Yahoo Finance How to Invest in the App Market
This is a big year for gaming apps, with two big releases -- Pokemon Go and the upcoming Super Mario Run -- getting most of the attention. But investors and speculators in the app development space are already looking for the next big thing.
If history repeats itself, it will be another two years before the next big gaming app hits. The popular Angry Birds, which was turned into a motion picture this year by Sony Corp. (ticker: SNE), was released in 2012. It was followed in 2014 by King Digital Entertainment's -- now owned by Activision Blizzard ( ATVI) -- offering, Candy Crush.
"I know there's a lot of excitement around Pokemon, so I don't want to rain on the parade," says Anthony Glomski founder of AG Asset Advisory in Los Angeles. "But in the app world it's important to understand that space is dominated by VCs [venture capitalists]."
That includes the likes of Sequoia Capital, DFJ Venture and Greycroft Partners, among others. "If you look at those guys, it's not unlike them to make 10 investments and lose money or break even on six or seven of them," Glomski says. "You are dealing with the best and brightest people in the tech and app market."
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Investing in apps is all about cultivating relationships to get a complete inside track with the founder. "If an investor is approached with an opportunity, first and foremost I'd avoid it," he says. "When you are investing in an app it's really speculative instead of making an investment."
Still, even the coolest apps sometimes don't take off. "Only a few companies are making it in this blockbuster environment," says Dan Ward, co-founder and chief creative officer for Detroit Labs. "There's a little bit of science to it, and at the end of the day, it's just like a movie. If people don't like it, they don't see it."
"I recently asked a developer of a well-known app, 'Are we are the point of have we done all the things that we can do?'" Glomski says. "He said it's akin to when the automobile was first put on the road. Was it perfect? No. Apps are the same way, we are growing and building on what we've already done."
For investors, Ward points to superstar companies like Finnish-based Supercell, known for its top-rated Clash of Clans and Rovio, which created Angry Birds.
"Apps have been a thing for so long," Ward says. "It's where people go to get information and where people tend to search 'if something is happening.'"
Watch for cross-pollination apps. "The hardest thing is getting someone to download an app," Ward says. "The next hardest thing is getting them to open it more than once."
Instead of standalone apps, many apps are allowing multiple third-party apps to be used concurrently, such as the funny JibJab Media music video e-cards.
Look for trends. Apps especially in the food and drink category are popular, but "any type of app that allows a human not talk to another human seems to be doing well," Ward says.
Also look for more pro-level camera apps with dual lenses, and enhanced pushed 3D notifications, where users press down on their phone to automatically receive more proactive information, such as a 3D map, Ward says.
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Messenger apps such as Snapchat and iMessenger are allowing friends to virtually collaborate and even shop with friends on companies like Zappos, which is owned by Amazon.com ( AMZN), he says. "It's about being where users are already spending their time," Ward says.
Look at brick-and-mortar businesses. For investors who are interested in the app market but don't want to invest too heavily, this may be a good option, Glomski says. One option is Domino's Pizza ( DPZ), which created an app that can order a pizza. Customers can also tweet out a pizza emoji to buy a pie.
"The more prudent way to approach investing in apps is to get indirect exposure to it," Glomski says. "It feels like a trend in nearly every space from hospitality to transportation. If we stop and think about how our phones were three years ago and what they do now, it's somewhat life changing."
Think about diversification. "For every app that has succeeded there have been many that didn't gain traction," Andrew Chanin, CEO of PureFunds, a New York-based research firm that focuses on tech sector exchange-traded funds. "By diversifying your exposure to multiple app companies, you may be able to reduce individual company risk."
According to Statista, in September nearly 25 percent of that market is in the gaming business, followed by business, which has 10 percent of the market sector.
"There isn't necessarily an area that hasn't been hot," Chanin says. "It's just areas that companies are constantly trying to improve on. It's a competitive market because phones can only store so much memory and apps. The more apps that people download, the likelihood other apps get buried."
Consider various ETFs. Emerging-growth technology ETFs is another option for investor. PureFunds offers a video gaming ETF ( GAMR), a big data ETF ( BIGD), a fintech ETF ( FINQ) and IPAY, a mobile payments ETF. Both FINQ and IPAY include PayPal Holdings ( PYPL) and Square ( SQ).
"Any of your portfolio you use for investing in this market should be purely discretionary funds that you have on the side and you feel comfortable losing," Glomski says.
As more people use mobile for everything, this is only going to get bigger. According to Nielsen Mobile Insights, "smartphone penetration across the total U.S population for adults 18 and older increased to 74 percent (81 percent of mobile subscribers) in the fourth quarter last year, with smartphone owners using an average of 27.1 different apps per month."
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Just think about apps for the likes of Airbnb and Uber. "What we are seeing has only just begun and it's only going to continue," Ward says.
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