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Groupon Results: A Buying Opportunity for Social Media ETF?

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Social Media space has given a mixed second-quarter performance with earnings of some companies sizzling and some still struggling. While Twitter (TWTR), Facebook (FB - Free Report) and LinkedIn took flight post earnings, some companies like Groupon (GRPN - Free Report) disappointed investors and slumped post earnings.  (read: Twitter Tweets a Solid Q2, ETFs Jump).

Like Q1, Groupon faltered this season as well. Groupon’s loss per share of 2 cents bettered the Zacks Consensus Estimate of 4 cents loss per share. However, the loss per share widened on a year-over-year basis. Its revenues of $751.6 million (up about 23% year over year) fell short of the Zacks Consensus Estimate of $761 million (read: Groupon Earnings and Twitter Sell-Off Hit Social Media ETF).

Although the company's total active user numbers surged 25%, guidance for Q3 was palpably dull. For the third quarter, revenues are forecast between $720 million and $770 million while the company is expected to breakeven on the bottom line or report earnings per share of 2 cents. The Zacks Consensus Estimate called for 2 cents earnings per share. For the full year, Groupon lowered its EBITDA guidance from $300 million to over $270 million.

Market Impact

A revenue miss and lackluster guidance were sufficient enough to dampen investors’ mood. Following Q2 earnings release after the closing bell on August 5, GRPN shares retreated nearly 13% the next day.

We would like to note that Groupon is “in transition” as intimated by its CEO, though the transitions seems to be taking longer than earlier expected. The embattled deal-site might reverse the trend in the coming quarters. Rising e-commerce spending on mobile devices, a profitable domestic market and an under-penetrated international market should augur well for the company.  

The story is generally cogent for the other players in the industry. YELP Inc. (YELP) turned profitable in the second quarter of 2014 by posting earnings of 4 cents per share in July end. Earnings compared favorably with the Zacks Consensus Estimate of a loss of 3 cents per share. This profit was primarily attributable to robust revenue growth of over 61%. Revenues exceeded our estimate too. Yelp’s guidance was bullish for both the third quarter and the full year.  

Shares of LinkedIn (LNKD) jumped 13.3% since it reported Q2 earnings on July 31 after the market closed. The professional networking company’s adjusted earnings (including stock-based compensation but excluding other one-time items) per share of 4 cents beat the Zacks Consensus Estimate of a breakeven. Revenues surged 46.8% year over year to $533.9 million breezing past our estimate as well as management’s guided range of $500–$505 million. LinkedIn raised its fiscal 2014 outlook.

Altogether apart from a few pitfalls, the social media space is shaping up. Global X Social Media Index ETF (SOCL) is a pure play on this space having many of the aforementioned companies in its top-10 holdings. As of August 5, SOCL was down 1.64%.

Since the outlook for the sector is quite promising, investors can easily use the recent slide as a buying opportunity of SOCL. Through SOCL, investors can simultaneously be in touch with the most sought-after social media companies (read: 4 Ways to Play Earnings Growth with ETFs).

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 $145.5 million of assets in 32 holdings. The in-focus Groupon takes the eleventh spot in the fund accounting for about 4.26% in the portfolio.  

Facebook, LinkedIn,Yelp and Twitter take the second, third, eighth and eleventh spots in the fund respectively with about 11.37%, 10.84%, 4.60% and 4.24% share. 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 (read: Facebook Beats but Lofty Valuation Puts These ETFs on Watch).
SOCL has lost nearly 7% year to date and while more volatility is imminent thanks to valuation as well as rising rate concerns, there are plenty of sound companies in the space, suggesting that an ETF approach might now be a better way to play the segment. Over the last month, to say more specifically this earnings season, SOCL added about 1.59% against 1.83% loss incurred by the broader market fund SPDR S&P 500 ETF (SPY).

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