Finally there’s a viable way to make money off social networking web-para-sites. I mean, we all saw how the popularity of Facebook, and Twitter made it a virtual gold mine, the problem however, was how to mine it. We waited a few years to see just how this social trend would create investing opportunities, and I’ll tell you exactly what it is. The formulas is quite simple, its so simple you’re going to slap yourself.
Profiling + advertising, multiplied by a really really lot of people.
It’s a concept that Google built it’s empire on, and it’s a concept that made a lot of people a lot of money. I remember sitting in my economics class shortly after the turn of the century, my professor teaching us that globalization and customization were the wheels that moved the new economy. Unfortunately, my professor failed to mention that this economy was borrowing a lot of money, or to illustrate, it putting the pedal to the metal on an empty tank of gas. The result, a lot of unemployment, foreclosures, less investment, re- educating, restructuring today. Yeah, we’re changing the tires and slowly filling up the tank. Slowly. Therefore, if I were back in my economics class, I would argue that the “come-back” economy was moving toward localizing. Keep that term in mind for the next few years, because localization, not globalization, is what will have a big impact on the economy. I’m not saying that globalization is dead, but based on the trends following the aftermath of 2008, I’m beginning to see businesses, especially small businesses growing faster due to focusing their target markets on local markets first. This is not new, but the magnitude of it is alarming.
What event was the alarm? For me, the alarm went off when Google, the god of the masses, made a huge bid for social networking coupon company Groupon. Don’t ignore this. When google goes shopping, you get in line. For those of you who don’t know what Groupon is, it’s basically an intermediary between mass consumers and local companies. Naturally, the birth of this concept came from social networking websites because that’s the best forum to connect consumers with local businesses. How does Groupon work? Sign up for an account and you’ll learn fast. Basically, everyday it advertises one or two small businesses of a certain State, offering a coupon for sale. If a certain amount of people commit to buy the coupon, then the coupon is valid. From an accountants point of view this is genius. Basically what you are saying is that, I will give you 50% off only if 1,000 people agree to buy this product or service too, hence the term Group-on coupon. Therefore, from the retailers standpoint, you know that you will break-even or make money. Think of it as eBay’s “reserve” amount. But the real value that the retailer gets is not from the sale of 1,000 items, but that he has made his product or service aware to at least 1,000 consumers! Amazing concept… I don’t know why I never came up with this idea before. Actually I’m sure the idea has been alive for a while, but only became profitable and realized with the arrival of giant social networking websites. Again, localization will be a goldmine in 2011 and for the years to come.
To get a users point of view I actually joined Groupon and have alerts sent to my smartphone. So far without purchasing anything I was able to discover a few nice breakfast places on the other side of the island. I can see why Google wanted to buy Groupon ( for $5 billion though? That’s a bit pricey). Anyway, whether you like Groupon or not, what I’m try g to illustrate here is the success story of localization… Craigslist, Vistaprint, etc.
So how do we make money off this? Well, I have two stocks for you, oneI already raved about last month, the other, a new company that has lots of room to grow.
(1) OPEN- Open Table is already over a billion in market cap, so you definitely want to consider adding OPEN to your portfolio if you’re more on the conservative side. Open Table is a leader in the localization concept of consumption. As I’ve mentioned before, what Open Table does is provides “product awareness” by promoting deals, coupons, specials, reservations for local restauarants. I’m actually waiting for them to gain more popularity, but the concept of networking restaurants is going to make them bank money in the future.
(2) ReachLocal (RLOC) – okay, this sucks because I wrote this piece over the weekend, and it’s up 7% today. Anyway, ReachLocal i the company I really wanted to get in on this post. I believe Reach Local (RLOC) will have a huge year in 2011. Reach Local is the closes thing to Groupon, and I believe Groupon will go public in 2011. However, when it does go public, everyone who knows about Google’s bid for it will be investing in Groupon. Which means Groupon, will be way overpriced. If you can get a good price, then good for you. Meanwhile, I think this opens an opportunity for RLOC to make a move.
What is Reach Local and what do they do? RLOC provides search engine marketing to small to medium sized businesses. Last year they ranked 39 on Inc magazine (yes I subscribe to that magazine lol). In a sense, their model is quite similar to Groupon:
So, you could view them as another advertising company, but I like them more because they target local markets. They have a very impressive resume on growth, probably because they are a new company prospering at the right time when the localization concept is blooming within the small to mid size business markets (SMBs)….
For FY2009 with year ended 31 December 2009, the company reported revenues of $203.1 million, up 38.4% from $146.7 million in revenue for FY2008. Furthermore the company had $10.0 million in net income for FY2009, a large increase from a net loss of $7.0 million for FY2008. 
RLOC is a small company, so the ride will be bumpy. But the marketcap of 600M means there’s a lot of room to grow. I’m waiting for more big buyers, so be patient as you buy this one. I suggest buy slowly on profit taking, and aggressive on high volume rallies, aka, momentum stock status. Remember, the just because RLOC targets SMBs, that doesn’t mean they can’t make money. It’s the power of large numbers, much like our Chinese picks. And for proof that you can make money in this sector, just look at the story of VistaPrint (VPRT). We love VPRT for making everything cheap, but we hate them because now everyone and their grandmother has business cards. Nevertheless, that illustrates that the market is hot in the SMBs, and I blame the new “come-back economy” on that.
So what am I trying to say here? There’s some major trends happening behind the scenes, and if you pay attention to them, you will see where the money is flowing:
1) American economy is in recovery mode after housing and bank crisis, tax crisis, Dancing With the Stars crisis.
2) Unemployment numbers up
3) Enrollment in supplemental education
… all of this are small pieces that shows our economy is shifting; due to loss of jobs, change of employment etc, SMBs (small to mid-size businesses) are becoming a major play.
4) social networking is finally becoming a source of cash flow. Think…. Groupon, Yelp, Open Table, and Reach Local
5) therefore, localization is becoming a significant play, as we are hearing less of globalization
6) Google and Yahoo willing to spend billions on mass social websites, but social websites saying “no thank you”, says to me that there’s something big in store for this unique “industry”
7) Power to the masses!
Anyway, I’m pretty excited about companies like Reach Local, Open Table, and maybe even Groupon. I mean, as stupid as Groupon “sounds”, you have to admit, the concept is genius. Again, look for any news of Groupon being bought by Google, or for Groupon to go public. This will cause RLOC to move fast. As for OPEN, it is relatively priced high, but it’s moving fast on the IBD 100 so I can live with that. Anyway, I’ll keep yall posted on any news with RLOC so stay tuned.
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Great post Gio! Thanks for the research and insight. Keep ’em coming.
great post! as a side note, you know there is a huge inside lockup on RLOC coming off soon?
The Dot Com 2.0 Bubble
also, speaking of Yahoo, seems I hear thru Bloomberg talk might resurface of Microsoft bidding for it again.
Stock is hot. Thanks for the trackbacks 🙂
Great post. Just got around to reading it. The idea in a slightly different form has been around a long time. We’ve got a local radio station that runs a “shopper show”. People pay for a limited number of coupons giving discounts or actual product, B&B stay, etc.