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Nicholas Kitonyi
Nicholas Kitonyi
Articles (192)  | Author's Website |

Investing in the User Economy

The value of service subscribers or users is becoming the focal point for internet businesses

The importance of the number of users has been popularized by social media companies like Facebook Inc. (NASDAQ:FB), Twitter Inc. (NYSE:TWTR) and Snap Inc. (NYSE:SNAP). However, the concept of a user economy has always been the sole target for companies from millennia ago. In simple terms, businesses have widened their addressable market by targeting even those who are not customers, but could be.

As such, rather than just thinking about customers, businesses are considering subscribers and even general users. This model of operation has been made possible by the internet, web 2.0 and social media platforms. In fact, some businesses have been built solely on the basis of signing up as many users as possible with the expectation revenue and income will come later.

For instance, consider Amazon.com Inc. (NASDAQ:AMZN), which is one of the world's largest e-commerce platforms today. The company barely makes money on its current business model. While revenues are huge, so are its expenses.

As of February this year, the company managed to amass more than 300 million accounts stored on Amazon.com. While some of these accounts are created when a person purchased a specific product, often, the otherwise, one-off users end up purchasing more than one item. The same can be said of the likes of Apple Inc. (NASDAQ:AAPL), Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL), Netflix Inc. (NASDAQ:NFLX) and Facebook, among others.

While the iPhone is Apple's main product, the company also leverages its iPhone users by offering more services like iTunes, Apple Pay and Apple Music. By building this type of customer loyalty, it also lures some of its iPhone users into purchasing other products like the Mac, iPad and Apple Watch. Again, the goal here is to get users to buy or subscribe to one of the company’s products and then work from there to maximize the revenue per user.

This concept is now being adopted by startups and small businesses as they seek to make as much money as possible from every subscriber they have. Businesses are also determined to expand their addressable markets by creating social media accounts on some of the top social networking platforms. This shows just how important the user has become, with advances in technology creating a virtual economy that is accessible from anywhere in the world.

This has, in turn, created another market in the digital advertising space with several startups now offering social media services to small businesses in a bid to build a powerful base of followers and subscribers. In this market, some service providers specialize in building Twitter accounts to attract followers, while others focus on Facebook and Instagram followers. Keep in mind, some providers out there do not deliver what they promise, which has affected the growth of this unique market.

Nonetheless, it is clear the value of the user is becoming an important cog in the wheel of any business that plans to make money online. With most people now spending a sizeable chunk of their time on social media, web 2.0 platforms or video streaming services like YouTube, no business would want to miss the opportunity of turning the activity of internet users into cash.

As such, the internet user has created a virtual economy that now seems invaluable. In fact, there are investors who are ready to overlook the bottom line of a social media or e-commerce stock if the number of users keeps rising. For instance, when Netflix shares spiked last month, it was because the company reported it had added more than 5 million new subscribers to its premium video streaming service in the second quarter. The company’s bottom line declined sequentially from $178 million in the first quarter of 2017 to $65 million in the second quarter, as illustrated in the chart below.

Therefore, the share price spike following the announcement of Q2 results had nothing to do with earnings, but rather a massive increase in the number of subscribers. As such, it appears that investors are already predicting a better performance by the company for the foreseeable future.

Conclusion

This is the age of the user economy, where investors tend to make decisions based on the prospects of a company, which are purely determined by the growth in the number of users or subscribers. Small businesses have emulated the main players in the internet user space and some are taking drastic measures to amass as many followers as possible. However, it remains to be seen how long they can continue to battle with the best. The user economy is on fire.

Disclosure: I have no positions in any stocks mentioned in this article.

About the author:

Nicholas Kitonyi
Nicholas is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on research sites like Seeking Alpha and Benzinga.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. As a trader, Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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