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Time to Sign Out of Social Media ETF on Twitter's Low Q4

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Social media ETF Global X Social Media Index ETF SOCL has had a strong start to 2017 having logged about 11% returns so far. However, the fourth-quarter earnings results from the micro-blogging site Twitter TWTR are likely to undermine the fund’s winning momentum. Twitter recorded lower-than-expected revenues in its fourth quarter of 2016 and delivered the slowest quarter of revenue growth since it went public (read: Technology ETFs Hitting All-Time High).

Q4 in Detail

Non-GAAP loss per share (including the stock-based compensation expense) of $0.03 was narrower than the Zacks Consensus Estimate of $0.11 loss per share. The company’s non-GAAP earnings (excluding the stock-based compensation expense) were $0.16 per share, flat year over year.

Including the stock-based compensation expense, the company posted a loss of $0.23 per share on a GAAP basis. This was wider than the year-ago loss of $0.13 per share. Revenues of $717.0 million in the quarter missed the Zacks Consensus Estimate of $738 million. Revenues were up only 1% from the year-ago period.

The company finished the quarter with an average 319 million monthly active users (MAU). This indicated a 0.6% quarter-over-quarter and 4% year-over-year expansion. Investors clearly could not digest such small user growth on quarter-over-quarter basis.

The blow came in the form of guidance as well. Twitter anticipates its adjusted EBITDA between $75 million and $95 million for the first quarter, which came in lower than the FactSet analysts expectation of $189.1 million.

Market Impact

Soft MAU, a revenue miss and a soft guidance dampened investors’ mood as the stock tumbled over 12.3% in the key trading session following the release of earnings. Year to date, the stock is up just 0.7%. In the last year, the stock gained about 14.7%. Twitter has a Zacks Rank #3 (Hold), which is subject to change post earnings release.

The stock is a good growth play with a Zacks Style Score of ‘A,' but it lacks the value and momentum quotient as indicated by the score of ‘F’ and ‘D.’ There is a high chance that Twitter will remain subdued in the coming trading sessions, especially given the Zacks Industry Rank in the bottom 46%.

Not only Twitter, Internet company Yelp Inc. YELP also faced a negative impact on share prices post earnings release on February 9 after market close. The company’s bottom line beat estimates but revenues met the same. However, its forecast for Q1 and 2017 revenues were below consensus estimates, as per the source. The stock lost about 9.3% after market close (read: ETFs in Focus as Snapchat Files for IPO).

How Will Social Media ETF React Ahead?

The latest bunch of results makes it important for to have a look at the social media ETF SOCL. Twitter takes about 10.62% of SOCL. As a result, the company’s results are crucial to the entire social media sector. Twitter pushed it down by 1.4% on February 9.

Plus, a freefall in shares of Yelp – which accounts for 2.84% of SOCL – after hours, will make matters worse. It may see weakness in the coming days if some other networking site comes up with weak results or forecast. However, investors should note that these weak results can be annulled by the impact of stellar results of Facebook (FB - Free Report) , SOCL’s top holding with about 11.46% share (read: 4 Tech ETFs Set to Soar on Facebook's Stellar Q4 Results).

At the current level, SOCL carries a Zacks ETF Rank #3 (Hold). So, investors having a strong gut for risks can play this dip. SOCL returned a whopping 52% in the last one year (as of February 9, 2017) (see all technology ETFs here).

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