A Quantification of the Social Media Industry

According to an industry research firm, the social media industry has estimated revenues of $8.6 billion as of mid-2014. It has seen just over 36% annual growth since 2009 and is projected to continue growing at almost 23% through 2019. There are approximately 6,500 major businesses within the industry with over 20% of these businesses located in California. The industry's revenues are considered volatile, which tends to be the norm for growth stage industries. The organizations that the industry consists of receive no government assistance, such as subsidies, and there isn't a large amount of government regulation, but bills continue to be produced in Congress that can severely affect the current dynamic if passed.

Based on revenues, the top three players in the industry are Facebook with 68.5% market share, LinkedIn with 15.6% market share, and Twitter with 12.2% market share. We'll take a deeper look at these three companies in the next section. For now, it is important to note that these companies generate their revenues primarily from advertisements that they display on their websites and mobile apps. In 2013, Facebook generated almost $3.3 billion in ad revenues in the US. Twitter and LinkedIn trailed behind with $432.6 and $337.1 million respectively. Major industries, such as healthcare/pharmaceuticals, energy, and others are estimated to spend 7.4% of their marketing budgets on social media and are expecting to increase that to 10.1% in the next 12 months and to 18.1% in the next 5 years.

These three companies are absolute behemoths, worthy of a granular analysis as there is much to learn from them. We'll look into each company in the following section with an overview of their executive teams, their market values, and some of their strategic moves over the past few years. Since we'll be taking a close look at these companies, we can set some industry-wide benchmarks to which we can compare each company.

Seeking the perfect portfolio for benchmarking

The benchmarks will be defined by using a portfolio consisting of several major entities that currently have at least one social media solution in use or can create and market one that would be widely accepted and utilized by a large audience within a reasonable period. The companies that the benchmark will consist of are: Twitter, LinkedIn, Google (GOOGL), Facebook, Microsoft, Yahoo, and Yelp. Note the justification used to include Microsoft, Yahoo, and Google. While Microsoft and Yahoo have a SNS, so.cl and Tumblr respectively, it doesn't appear to be comparable in terms of popularity and user-base to the others. But that doesn't mean that a company like MS or Yahoo can't afford to invest in the research, development, and marketing required to build a user-base and become a major player in this space. Google has several social media solutions, the two most popular being YouTube and Google+. Furthermore, Microsoft, Yahoo, and Google have been operating for a significantly longer period of time than the rest of the companies. By the time the social media industry had only begun to start forming into the giant it is today, Microsoft, Yahoo, and Google already had successful products and services in use by an incredibly large number of people across the globe.

The first thing we'll look at is average stock performance of these companies compared to the S&P 500. For the sake of simplicity and because Twitter hasn't been public for a year yet, the date ranges for performance comparisons will be for the seven month period from the beginning of January 2014 through the beginning of August 2014. This type of comparison is usually done to increase levels of regret in people by showing what might have been a better investment over the past year, the company or industry being analyzed or the typically safe index it is compared to. We're doing it to understand how each company compares to our benchmarks. In this Google portfolio chart, we see that there is a bit more volatility in the industry and the S&P has earned a 4.94% lead over the social media industry within this timeframe.

Next we'll look at several key financial ratios, Profit Margin, Current Ratio, Total Debts to Total Assets, Earnings Per Share (EPS), and the Price to Earnings Ratio (P/E). We won't go into a long tutorial on what the ratios mean; a link for each ratio has been provided to investopedia, where you can find very informative explanations. Financial ratios are used to measure and compare various aspects of a company. At a high level, these ratios measure liquidity, debt, asset management, profitability, and market valuation. Understanding how these companies perform is crucial for anybody who wants to be involved in the industry, whether you're an investor, an entrepreneur, a marketing professional, or even just somebody looking for employment within the industry. This information lets you know what you've got to strive for or beat.

Shown above is a chart with the average performance ratios for our industry companies based on the second quarter 2014. As of 8/4/14, the average EPS and P/E for our portfolio is 3.18 and 22.46 respectively. It is important to note that Twitter, LinkedIn, and Yelp have negative EPS, which results in zero values for P/E as EPS is the denominator in the P/E formula. While a negative EPS can mean the company is losing money, it can also mean it is investing in R&D or its sales process and is expecting greater returns in the future. That being said, these negative values do have an effect on our benchmark averages.

We've performed a quantitative analysis and set some benchmarks. In the next section we'll take a closer look at the market leaders within this industry.