On Tuesday, Twitter (TWTR) came out with their second-ever public earnings announcement, this time for Q1. Like its inaugural earnings, the company saw a plunge in its share price despite comfortably surpassing the consensus estimate on both lines. Lower-than-expected user growth hurt the company for two quarters in a row and soured investors’ mood (read: Sell-Off in Social Media Stocks Puts SOCL ETF in Trouble).
Q1 in Focus
Twitter remained in the red for profits, incurring a 22 cent loss per share (ahead of the Zacks Consensus Estimate) on better-than-expected revenues of $250 million. The company finished the quarter with an average 255 million monthly users, up 6% quarter on quarter. Notably, user growth has fallen from the prior highs of 18% two years back. The rate has been subdued lately with the slowest rate posted in 4Q13.
Growth in Timeline views which declined steadily in 2013 and ad revenue per 1,000 Timeline Views dropped 3% quarter on quarter. However, timeline views in the international arena was much slower than in the U.S. indicating that foreign users are refreshing their Twitter accounts less often (read: Is the Social Media ETF Losing Its Luster?).
The persistent underperformances in two major metrics of a social networking company are self-explanatory for the shares’ plunge in the after hour trade. Shares fell 11.24% in after hours trading on about double the regular volume. Ahead of the closing bell, Twitter stock was up 4.64%, hinting at how badly its results hurt investors’ expectations (read: Twitter Volatility Puts These ETFs in Focus).
Twitter does not have sizable exposure in the overall ETF world with only two ETFs – Global X Social Media Index ETF (SOCL - ETF report) and Renaissance IPO ETF (IPO - ETF report) having, respectively, 4.87% and 2.10% exposure at present. However, we believe that such a massive sink in one of the component stocks should impact the performance of the duo to a large extent. Below, we have highlighted these two funds in detail:
SOCL in Focus
SOCL focuses in on companies across the globe engaged in some aspect of the social media industry. The fund tracks Solactive Social Media Index and invests $133.8 million of assets in 27 holdings.
The in-focus Twitter has takes the seventh spot in the fund. Investors should also note that over time, SOCL has reduced its exposure in Twitter by about 2% pushing it down from the fifth to the seventh position.
SOCL has company-specific concentration risk putting more than 60% of investments in its top 10 holdings. The product charges 65 bps in annual fees. SOCL lost nearly 17.7% year to date (as of April 29, 2014) and fell 2.35% after hours, most probably as a reflection of Twitter’s loss and the impact of this on other social stocks.
SOCL has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘High’ risk outlook.
Renaissance IPO ETF (IPO - ETF report)
IPO – as the ticker suggests – targets initial public offerings in the U.S. markets for its exposure. The fund holds the newly listed companies for a maximum of two years and can add important firms in as little as five days after their debut. Since TWTR is a new entrant in the market, it easily made a place in IPO.
Holding 61 securities in its basket, IPO has amassed an asset base of about $30.2 million. IPO charges 60 bps in fees. Here too, Twitter has been pushed down to the fifteenth position from the fifth position via an exposure reduction of about 1.50%. Twitter currently holds about 2.10% of the portfolio. The fund doesn’t have any particular sector focus.
Probably thanks to the low exposure in Twitter, the fund did not get thrashed too badly. IPO was down 3.4% in the year-to-date frame and added about 1.38% at the close on April 29.
Social media has been on a tear to start the year thanks to the high-beta pain, and bubble fear leading to momentum sell-off. Amid such a backdrop, Twitter’s results might come as a blow and hit the entire sector at least for the short term.
However, investors should note that while indicators have surely been sluggish in recent times, measures were not downright lackluster this quarter. Many indicators like timeline views improved sequentially. Timeline views per MAU have also swung back to the positive territory. On the other hand, the social media giant Facebook ((FB - Analyst Report)) had a robust Q1 this year thus pointing to no absolute deceleration in the industry dynamics.
It’s just that the company needs to push itself more on improving its key metrics. Twitter carries a Zacks Rank #3 (Hold). While things are little volatile as of now, investors having a strong stomach for risks, can bet on the aforementioned ETFs on Twitter’s recent dip.
In any case, the social media space presently offers some bargains after being smashed this year and the fund SOCL is a top-rated one thanks to grater exposure in some other quality stocks in the space.
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