April 20, 2024

Shelby McFaddin, an investment analyst at Motley Fool Asset Management, spoke with Quartz for the latest installment of our “Smart Investing” video series.

Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.

ANDY MILLS (AM): If I’m looking to invest in a social media company, which one stands out to you as a reliable one with good fundamentals?

SHELBY MCFADDIN (SM): Well, at this point in time, social media is really an advertising business. So Reddit is new, so it’s hard to say how the advertising engine is going to work for them. We’ve gotta see some filings still. So I think the quickest answer to this question is probably Meta because in this day and age, that’s how social media companies are making money. It’s advertising and they just have an absolutely astronomical reach on both sides of the generational ladder.

AM: I’m gonna zero in on Meta just for a second. They’ve had quite a turnaround. You mentioned the cost cutting measures. What else has brought them back into the spotlight?

SM: I think refocusing where they’re allocating their capital has been tremendous. They’ve also gone ahead and really zeroed in on monetizing things like reels. So they made a tremendous amount of adjustments in 2022 and 2023 when it comes to compensating creators. And they’re also digging into more ways to go ahead and leverage their advertising, especially when it comes to retail media. So if you are a user of Meta platforms, whether it’s Instagram or Facebook, you might notice there are more ads, they’re more interactive, they’re more tailored. So that is something that they’re really, really engaging in. And when we consider the fact that goods inflation has eased a bit quicker than services, we are now seeing the swinging of the pendulum returning to those little impulse purchases of goods and swinging away from, well, life is a little bit rough, let’s go on vacation. We’re, we’re kind of outta that point that excess cash for those sudden vacations is dwindling. But the impulse purchase, there seems to be a little bit more capital left for that. And Meta has been capitalizing off of it pretty well.

Read more: Big tech is swallowing up AI

AM: So I’ve noticed the increase in ads on Instagram.

SM: Stark.

AM: Yeah. At what point do they go ‘That’s enough’?

SM: It’s an ad business. When we look at, let’s say Facebook in terms of the Meta umbrella. So those I would expect are just going to continue to ramp up. I think the question will be what form they’re going to take. So it initially starts with you seeing them in your feed, then they start coming up in stories. Now what’s been really big for them has been in Reels. So if you’re scrolling through, you then see an ad and so now you’re getting them in three different places throughout your journey on the application. I would probably expect it to just go up until they reach a point of diminishing marginal returns.

AM: Are they gonna just put ads in my brain? What’s going on?

SM: I don’t know. We might have to see what’s going on with that. Was it Musk that had a brain chip of some sort? So we might have to see, but I mean when the concept of walled gardens and different places where consumer data is stored, that is a universe that is increasingly available to different retailers. And so your data, however well encrypted, there are identities for you for each one of us. And so as different companies are able to leverage that, you will continue to get more and more personally tailored advertising.

AM: Motley Fool has said that Meta is beating Google in the ad business. How did you arrive at that conclusion? Because Google has dominated the ad business for decades now.

SM: Yeah, so Meta has potentially a wider and longer runway because of their leaning towards goods over services. So when we think about search, it tends to dominate a little bit more on services now because the tailored advertising really succeeds in goods as does retail media. So it’s comparatively easier to sell someone something from the Container Store while they’re scrolling on some sort of social media application than it is to convince them to buy a plane ticket. It’s a larger purchase and it’s just more complicated overall. So the path from initial site to click to purchase is much shorter for goods. And so there is still quite a runway for Meta. But the way I see it is that comparatively speaking, the runway might be longer and wider for goods compared to services, which is where we see Google kind of dominating.

AM: Gotcha. Well, thank you so much, Shelby.

SM: It’s a pleasure.

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