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Twitter Tweets a Weak Q1 & Soft View, ETFs in Focus

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On April 28, Twitter (TWTR) came up with a weak Q1 and a disappointing guidance. The social networking site then saw a freefall in its share price as it failed to live up to many investors’ expectations.

Q1 in Detail

The company’s first-quarter 2015 non-GAAP loss per share (including the stock-based compensation expense) of 20 cents was a penny ahead of the Zacks Consensus Estimate. Excluding the stock-based compensation expense, the company earned 7 cents per share on a pro forma basis.

Revenues of $436 million in the quarter fell shy of the Zacks Consensus Estimate of $455 million. ‘A lower-than-expected contribution from newer direct response marketing products’ was held responsible for lower-than-expected revenues. However, revenues grew about 74% year over year.

The company finished the quarter with an average 302 million monthly active users, up 18% year over year and 14 million higher sequentially. Growth in international revenues remained robust at about 109%. Notably, international revenues accounted for one-third of total revenue.

However, the real blow came in the form of guidance. Twitter anticipates its total revenue for the second quarter to range between $470 million and $485 million, way below the Zacks Consensus Estimate which is pegged at $538 million. For 2015, revenues are projected to be in the range of $2.170 billion to $2.270 billion, down from the earlier guidance of $2.3 billion to $2.35 billion.    

Market Impact

This subdued performance dampened investors’ mood as the stock was severely beaten down in recent trading sessions. Following the earnings leak on April 28, about 40 minutes ahead of the closing bell, Twitter shares saw a landslide, plunging over 18% for the key trading session of April 28 on about fourth times the regular volume.

Shares slid about 8.9% on April 29. However, after such a massive sell-off for consecutive two days, Twitter stock recouped 0.94% after hours. Year to date, the stock is still up 8.3%.

Twitter does not have a sizable exposure in the overall ETF world with only three ETFs – Renaissance IPO ETF (IPO), Global X Social Media Index ETF (SOCL) and ARK Web x.0 ETF ((ARKW - Free Report) ) – having major exposure of 8.17%, 3.66% and 3.20% respectively, at present. Such a huge fall in one of the major components should impact these ETFs.  Below, we have discussed these three funds in detail:

IPO in Focus

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 still a new candidate in the market, it has easily found a place in IPO (read: Forget U.S. IPOs, Go Global With This IPO ETF).

Holding 56 securities in its basket, IPO has amassed an asset base of about $29 million. IPO charges 60 bps in fees. Twitter takes the second position in the fund. Year to date, the fund is up over 6.3%. On the day of Twitter earnings, the fund was off over 1.4% while the fund has shed 1.7% on April 29.

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 $113.6 million of assets in 34 holdings. Twitter takes the tenth position in the fund with about 3.66% exposure (read: 'March Madness' in ETFs Too).

The product charges 65 bps in annual fees. SOCL has gained nearly 14.8% year to date (as of April 29, 2015). SOCL has a Zacks ETF Rank #3 (Hold) with a ‘High’ risk outlook (read: ETFs to Watch on Facebook's Q1 Disappointment).

ARKW in Focus

This actively managed fund holds about 50 stocks in its basket with none holding more than 5.5% of total assets. Twitter takes the ninth position in the fund with about 3.20% exposure. The ETF is almost seven month old with AUM of $11.4 million. The product charges 95 bps in annual fees. The fund is up 12% so far this year but has lost 0.6% on April 29 (read: 3 ETFs Leading the Technology Sector Surge).
 
Bottom Line

Twitter currently has a Zacks ETF Rank #2 (Buy) and belongs to the top-rated Zacks Industry. At the time of writing, its Zacks Industry Rank falls in the top 27% zone.  However, following the recent results, analysts are likely to turn their back on Twitter and the stock is expected to see a series of negative revisions.  

Investors should note that the company is investing heavily in its products and services as well as enhancing its focus on the international arena. On the very day of the earnings release, it announced that it has acquired a renowned marketing technology company – TellApart. Twitter has also struck a deal with Google's DoubleClick platform to enhance the ad performance. So, investors intrigued by these initiatives and having a strong stomach for risks can buy Twitter shares on the recent dip.

Still, adding Twitter to one’s portfolio might not be a very safe idea, but having a basket approach via IPO, SOCL or ARKW might be a great idea as far as risk minimization and diversification are concerned, and especially after this sluggish earnings report.
 
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