Think twice the next time a company spruiks “network effects”

The following article appeared on Livewire on January 7, 2019

Technology companies are increasingly seducing investors by spruiking their ability to harness “network effects”, whereby the value of their products and services increase as more customers use them.

It’s an easy message to sell to investors. After all, the more data and customers a company captures within its ecosystem, the bigger, better and more profitable it will become, right?

But as Joe Magyer, Chief Investment Officer at Lakehouse Capital warns:

“The phrase ‘network effects’ gets thrown around really cheaply these days. But the reality is there aren’t many companies that have powerful and valuable network effects.”

In this short video, Joe walks through what he looks for as part of his investment process and discusses two tech stocks leveraging and monetising network effects effectively.

Disclosure: Joe Magyer owns shares of Facebook and Paypal, which are also holdings of the Lakehouse Global Growth Fund.