Social media has taken the market by surprise. With Meta Platforms (NASDAQ:META) leading the way but joined by Alphabet (NASDAQ:GOOG, GOOGL), and Snap (NASDAQ:SNAP), the social media industry is expected to grow at a compound annual growth rate (CAGR) of nearly 26% through 2031.
Despite this, some companies are falling behind on capitalizing on this trend. It can be a mix of slowing user growth, stagnating revenues or blatantly bad financials. My investing methodology revolves around buying high-quality businesses with great growth at fair prices. More importantly, I ensure the companies I invest in are financially stable and will last several decades.
However, as you look to the future, it is important to capture great companies in a fast-growing industry. It is equally essential to avoid bad businesses that will struggle to maintain market share as competition fiercens.
Etsy (ETSY)
Etsy (NASDAQ:ETSY) is an e-commerce platform that is also attracting social media influencers to promote merchandise. During its COVID-19 highs, Etsy stock rallied to almost $300 per share. That is a far cry from its current share price of $50 as the company’s growth increasingly stagnates.
Even with this significant fall in price, the stock still trades at heavy multiples relative to its growth. It currently has a price-to-earnings ratio of 26.69 and an EV/EBITDA ratio of 20.88.
In the first quarterEtsy’s top line grew just 0.79% year-over-year (YOY) as net margins crashed by 16%. With a market share of just 0.38%, Etsy is being crushed by competitors like PDD Holdings (NASDAQ:PDD), the proprietor of Temu, which has seen its market share rise from just 7% in 2019 to 19% by mid-2023.
Some investors are optimistic about the company’s initiatives for operational efficiency, such as the outsourcing of its paid search efforts. However, this has been met with less-than-promising active buyer growth, which was just 1.9% YOY during the period.
From a valuation standpoint, Vipshop Holdings Limited (NYSE:VIPS), one of Etsy’s key competitors with similar revenue growth, trades at an EV/EBITDA multiple of 2.64. On the other hand, Amazon (NASDAQ:AMZN) trades at an EV/EBITDA multiple of 21.60. Slightly more than Etsy, the e-commerce giant’s growth is 15 times higher at 12.5%, showing that Etsy still has more room to fall before it bottoms.
Rumble (RUM)
Rumble (NASDAQ:RUM), which some have deem a “YouTube copycat,” prides itself on free speech. However, the company’s core business model falters as the stock trails lower.
The company has had to confront growing challenges. In Brazil, for example, the government is calling for censorship and removal of certain popular accounts critical of the da Silver regime. Similarly, several Western countries, including France and Australia, also want to censor Rumble content.
Rumble’s monthly active users (MAUs) also drastically fell by 25% quarter over quarter. The company’s top line was flat at 0.7% year-over-year growth, and most notably, earnings-per-share (EPS) continues to spiral downward from a 14 cents per share loss last year to a 21 cent loss last quarter.
This only adds fuel to the fire that lies in its balance sheet as total assets decreased by 20% YOY. While most investors would expect liabilities to subsequently decrease as well, they instead jumped by 60% as Rumbled struggled for profitability. In fact, margins have continued to deteriorate with the video site reporting a profit margin of -250% in Q1 2024, a 50% decrease YOY.
With slowing user growth, a struggle for profitability and simply bad financial metrics, Rumble is trading at an EV/EBITDA ratio of -9.97. This is further exacerbated by a price-to-sales ratio of 13.85, nonsensical for a company that is experiencing flat sales growth.
Trump Media & Technology Group (DJT)
After being banned from both Facebook and X (previously known as Twitter), Donald Trump took matters into his own hands and created Trump Media & Technology Group (NASDAQ:DJT). It was an attempt to fight back against major tech companies such as Meta, Alphabet, and Netflix (NASDAQ:NFLX).
With DJT down 63% from all-time highs and Trump leading in presidential political polling, some investors wonder if it’s time to buy. To put it bluntly, the company’s underlying fundamentals are out of whack. Strictly from a financial perspective, DJT has some alarmingly low growth rates, with quarterly revenue decreasing 30% YOY.
To make matters worse, DJT lost $327.6 million in just the first quarter. To compensate, the company has diluted its common shares outstanding by 37%, which is not a good look. Aside from lacking good financials, the company’s user base is in decline. Truth Social’s average number of monthly visits tumbled 40% over the past year, showing an evident lack of interest from the general populous.
Lastly, DJT’s EV/EBITDA ratio of -48.52 falls far behind that of similar free-speech medium Rumble, being over five times lower with far-worse levels of growth and profitability. Simply put, investing in Rumble stock is dead money.
On the date of publication, Michael Que did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.