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After LinkedIn's Slump, Connect with the Social Media ETF?

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The social media sell-off was the sharpest pain for investors this year. If the high beta issues and a massive selling in momentum stocks were not enough, many of the companies of this space have reported gloomy earnings this quarter to stir concerns among investors about the investing zone (read: Sell-Off in Social Media Stocks Puts SOCL ETF in Trouble).

First, Twitter (TWTR - Free Report) had created despondency by posting sluggish user growth and witnessing a massive slash in share price, and then LinkedIn Corporation came up with lower-than-expected Q1 earnings numbers on May 1 which weighed heavily on the company’s share price.  Shares were off 8.38% since results hit the market (read: Twitter's Soft User Growth Puts These ETFs in Focus).

1Q Results in Detail

This online job-related site failed on the earnings front as its adjusted loss of 8 cents per share fared unfavorably with the Zacks Consensus Estimate of a penny and the year-ago earnings of 22 cents a share.

Though revenues grew 45.7% on a year-over-year basis to $473.2 million and came ahead of the Zacks Consensus Estimate of $468.0 million, this was the slowest revenue growth in four years, as per the USA Today. In 4Q13, revenues showed 47% year-over-year growth.

Guidance wise, LinkedIn again fell behind the Zacks Consensus Estimate. For the second quarter, the company expects its revenues to range between $500 million and $505 million (mid-point $502.5 million).

This midpoint was lower than the Zacks Consensus Estimate of $507 million. Not only this, the mid-point of the revenue guidance is 38% higher than year-ago revenues indicating a reiteration of the slowing revenue growth trend.  

For fiscal 2014, LinkedIn upped the forecast for revenues to the range of $2.06 to $2.08 billion from the range of $2.02 to $2.05 billion. Here also, the mid-point lagged the Zacks Consensus Estimate of $2.11 billion. Adjusted EBITDA is now expected in the range of $500 million to $510 million, up from the earlier forecast of $490 million.

Market Impact

Apart from missing the earnings estimate, a sort of downbeat tone was prevalent across LinkedIn’s indicators which clearly explain the more than 8% dive in share price on about triple the regular volume. Shares have now fallen more than 42% from its 52-week high of 257.56 hit last September (read: 3 Hit and Flop ETFs of April).  

LinkdIn’s situation has not been as grave as Twitter’s. It delivered better numbers on mobile engagement, member page views and unique visiting members. So, this dip can be used as a buying opportunity. However, investors should note that LinkedIn has a Zacks Rank of 5 or Strong Sell rating. Thus, it may be better to go for a basket approach rather than using single stock selection in this corner of the market.

Though LinkedIn does not have widespread exposure in the ETF world, it bears a sizeable focus in social media ETF – Global X Social Media Index ETF (SOCL). Many of SOCL’s top holdings like Facebook (FB) and Yelp (YELP) came up with decent results thus providing a good reason for investors to look toward this social media ETF.

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 $127.2 million of assets in 27 holdings.
The in-focus LinkedIn takes the third spot in the fund with 9.09%. 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 has lost nearly 17.7% year to date (as of May 5, 2014) and fell 0.91% on May 2, probably as a manifestation of LinkedIn’s drop 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, and it may be a better way to play this volatile space in the near term.

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