Global X Social Media ETF hurt by weaker advertising incomes

The Global X social media ETF has lagged in 2022. Increased competition and tightened social media advertising budgets have harmed company revenues, which has dragged down the price of the fund. However, longer-term growth remains strong for the industry.

The Global X Social Media ETF [SOCL] has continued to wipe out gains it saw in 2020. As of 29 September, the fund has lost 46.5% of its value since the beginning of the year and 11% over the last month. Investors have raised concerns that lower demand for online advertising will harm the industry’s main source of income.

The fund currently has 43 holdings in a wide range of social media companies from numerous different markets. Its largest holding is Tencent [0700HK]. The Chinese social media and video game conglomerate makes up 11.2% of total assets. This is closely followed by considerable holdings in US social media giants Twitter [TWTR], Meta [META] and Pinterest [PINS] with Chinese internet search company Baidu [BIDU] next in line as the fund’s fifth largest holding.

The Global X Social Media ETF saw exceptional performance in 2020 as global lockdowns drove social media engagement higher while people relied on the internet to connect. Annual gains in 2020 sat at 78.3% making it the best year for the fund since its launch in 2011. However, economic headwinds have since increased, and the fund has since struggled.

Top holdings drag down SOCL

Tencent, the fund’s largest holding, has been a primary source of the pain that the fund has suffered this year. The share price for China’s most valuable company has declined 40.5% year-to-date as a slowing Chinese economy and a regulatory crackdown have impacted growth.

Tencent posted second-quarter revenue of RMB134bn which was down 3% year-on-year and missed analysts’ profit expectations. Advertising revenue dropped 18% from that of the year before as Chinese advertisers showed less demand for the service.

Exacerbating the impact of global inflation, Chinese authorities increased regulations on games, slowing down the approval of new video games and restricting the hours that children are allowed to play them in an attempt to make them less addictive. The government paused approvals on games between July of 2021 and April of this year. While it recently approved on of the company’s new games, the crackdown is a significant roadblock to growth in the Chinese gaming market.

Inflationary pressures squeeze ad spend

Meta and Pinterest, which combine to make up 19.75% of the total fund, have seen similarly poor performance with respective 57.9% and 34.4% declines this year. Both have seen a drop off in advertising revenue in recent months with rising inflation squeezing clients’ budgets and forcing them to cut down on advertising spending.

Similarly, Snap [SNAP], the company that created Snapchat in 2011 which makes up 3.6% of the fund, has seen its value crushed by 77% this year as lower advertising demand points to lessening revenues. Second-quarter losses widened by 178% year-on-year down to $422m. The group attributed these losses to advertisers slashing their budgets, which is in turn due to inflationary pressures, as well as new privacy measures that make it difficult to target campaigns and track their success.

In response to the slowing growth, Snap has scaled back its ambitions by laying off 20% of its workforce and cutting investment in its technological and gaming outfits.

Social media spending set to increase

Despite the challenges facing capital markets for the social media industry, current analysis forecasts the sector to grow in the coming years. According to a study carried out by Statista, ad spending on social media sites will hit $384.9bn by 2027 and is projected to reach $226bn in 2022.  

Though their stocks may be struggling at the moment, analyst sentiment remains strong for share prices of the individual companies within the fund. Of the 55 analysts who provided ratings to the Financial Times for Tencent, 21 provided a ‘buy’ rating, 27 say that it will ‘outperform’, five suggest to ‘hold’, and there is one analyst each for ‘sell’ and ‘underperform’ ratings.

For Meta, 57 analysts provided ratings. 15 call it a ‘buy’ while 26 say it will ‘outperform’, 13 advise to ‘hold’, two rate it as an ‘underperform’ and one recommends to ‘sell’. 36 analysts who provided ratings for Pinterest, three of which recommend to ‘buy’, nine say it will ‘outperform’, 23 advise to ‘hold’ and one rates it a ‘sell’.