Gallup Poll Results on U.S. Consumer Buying Habits Support a Skeptical View of Social Media Business Valuations
Public companies in the Social Media business (facebook, Twitter, LinkedIn, Google, etc.) have all implemented global business strategies. Nevertheless, some substantial proportion of the business plans for each of these businesses, over the next near term, depend on sales to advertisers for the U.S. consumer markets. But the results of a Gallop® report on the buying habits of U.S. Consumers, published on June 23, 2014 may point to excessively optimistic revenue forecasts in these plans, and, in turn, even more inflated business valuations than previously appeared to be the case.
Here are some important points coming out of this report:
- 62% of a cross section of respondents to the survey reported Social Media had “No influence at all” on their purchasing decisions. Two caveats on this statement should be noted: 1) the numbers of respondents from each of four groups — “Millennials”, “Generation X”, “Baby Boomers”, “Traditionalists” — are not included in the article about the report, which is now widely available to the public (a link to the article is included in this post) and 2) despite a landing web page for the report, itself, the landing page does not offer the visitor any access to the report, so it is not possible to explore the report, at least at the time this post is being written
- But this percentage drops to 48% of “Millennials” who responded to this survey. “Millennials” are defined as people born after 1980.
- Only 5% of a cross section of respondents reported social media exerted “A great deal of influence” over their purchasing decisions. The percentage rises by 40%, to 7% when only responses from “Millennials” are considered.
In Facebook’s 10Q filing with the U.S. SEC, dated April 25, 2014, for the three months ended March 31, 2014, 45% of total global business revenue for the quarter was reported for the United States market, alone. The sources of revenue are clearly defined in this report as follows: “We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from our developers with applications on the Facebook website.”
Given the claimed results included in Gallup’s report, it might make a lot of sense for investors to recalibrate the cost of an investment in Facebook. In the opinion of this writer Facebook is grossly overvalued, as are most of its peers in this segment. Online advertising is simply better suited to the promotion of tangible items, or intangibles highly dependent on tangible factors, (for example, geographical location) than it is for purely intangible offers.
Since the range of items suitable for online promotion is, therefore, limited, the extent to which valuations have been inflated is even more extreme than this writer previously assumed to the be case.
Disclaimer: I have no current investment in any of the businesses mentioned in this post
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