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Groupon Earnings and Twitter Sell-Off Hit Social Media ETF

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It seems that the Global X Social Media Index ETF (SOCL) has fallen on hard times. The fund started the year on weak footing thanks to a massive sell-off in momentum stocks. After that, many of its components like Twitter (TWTR) and LinkedIn Corp. (LNKD) came up with downbeat Q1 results (read: After LinkedIn's Slump, Connect with the Social Media ETF?).

This is not the end either, as the losing momentum continued for SOCL in recent trading. The widened loss incurred by Groupon Inc. (GRPN) another SOCL component – took a beating on the fund. Along with Groupon, acute selling pressure in Twitter after the company’s lockup period expired had a negative impact on the fund.

Notably, Twitter plummeted 17.81% in Tuesday trading, pushing shares to a fresh all-time low in intraday trading on Tuesday. Meanwhile, Groupon fell 2.47% in the key trading session and fell 6.25% in after hours.  

Events in Detail

Groupon’s loss per share of 4 cents bettered the Zacks Consensus Estimate of 7 cents loss per share. However, the loss per share widened on a year-over-year basis.  Its revenues of $757.6 million (up about 26% year over year) also came ahead of the Zacks Consensus Estimate of $734 million.

Per Wall Street Journal, Groupon’s transformation to an e-commerce player from just a daily-deals site needs time.  There was no spark in the guidance as well.

The company expects its second-quarter adjusted earnings to come in between a breakeven and 2 cents per share while revenues are guided between $725 million and $775 million. Thomson Reuters' estimated 3 cents earnings per share for Q2 on $754 million revenues.

Coming to Twitter, insiders and early investors were allowed to sell the company’s shares, leading to a new epidemic of share sell-offs on an elevated level of volume.

This also reminds of bearish investors’ speculation that Twitter would spur another round of worries on the overvaluation status of the Internet stocks. Investors should note that, a few days back Twitter was hit by sluggish user growth in its Q1 results (read: Sell-Off in Social Media Stocks Puts SOCL ETF in Trouble).

Market Impact

Though TWTR fell out of SOCL’s top ten holdings in the wake of extreme bearish sentiment in the company, intense selling pressure in Twitter as well as Groupon has also punished SOCL as investors felt skeptical over the entire social media space. The fund shed about 3.78% yesterday (read: 3 Hit and Flop ETFs of April).

In such a backdrop, we would suggest investors to take a cautious approach on investing in the social media space as all are not bad reporters this season. In fact, Facebook (FB) and Yelp (YELP) came up with decent results ruling out an outright bearish sentiment on this social media ETF.

In fact, this sell-off can be used as an opportunity to acquire shares of SOCL at a compelling valuation. SOCL has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘High’ risk outlook.
SOCL in Focus
SOCL focuses on companies across the globe engaged in some aspect of the social media industry. The fund tracks Solactive Social Media Index and invests $128.3 million of assets in 27 holdings.
The in-focus Groupon takes the seventh spot in the fund accounting for about 4.86% in the portfolio. 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 17.6% year to date and while more volatility is certainly ahead, there are plenty of solid companies in the space, suggesting that an ETF approach may be the better way to play the segment for now.

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