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Social Media ETF Nosedives With Twitter's Weak User Growth

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The social media space is likely to be stressed post Twitter Inc.’s (TWTR - Free Report) second-quarter 2017 earnings release. The stock fell over 14% in the key trading session on July 27 as the micro-blogging website fell short of analysts’ expectation on user growth. However, the company beat on both lines.

Results in Detail

Twitter’s adjusted loss per share of $0.2 was narrower than the Zacks Consensus Estimate of a loss of $0.12 per share. Revenues of $573.9 million beat the Zacks Consensus Estimate of $536.8 million.

On a year-over year-basis, revenues fell 4.7%. Monthly average users (MAUs) of 328 million remained unchanged from the prior quarter but grew 5% year over year. Daily average users (DAUs) were up 12% year over year.

In the U.S., MAU grew 4% year over year but fell 2% sequentially. This was a substantial deceleration if we look at Twitter’s first-quarter 2017 performance when MAU was up 4% sequentially and 7% year over year. 

Inertia was also noticed in international MAU, which was flat sequentially and up 5% year over year. Twitter’s first-quarter 2017 performance saw international MAU rise 2% sequentially and 6% from the year-ago quarter. 

Market Impact

Stagnation in MAU dampened investor sentiment as the stock lost 14.1% in the key trading session following the release of earnings. The stock also shed about 0.7% after hours. Year to date (as of July 27, 2017), the stock is up about 3.3%.

The stock is a good growth play with a Zacks Style Score of ‘A,' but lacks Value and Momentum quotients as indicated by the score of ‘F’ and ‘C’, respectively.

How Did Social Media ETF React?

Twitter’s results make it important for us to have a look at the social media ETF Global X Social Media ETF (SOCL - Free Report) . Twitter takes about 8.82% of SOCL, holding the third position. As a result, the company’s results are crucial to the entire social media sector (read: 5 Hottest Tech ETFs of 2017).

The fund was down over 2% on July 27, the day Twitter came up with Q2 earnings. The fund’s second holding Facebook Inc. FB gained 2.9% yet couldn’t save SOCL (read: Tech ETFs to Tap on Facebook's Solid Q2).

The fund is up about 37.5% so far this year (as of July 27, 2017). SOCL has company-specific concentration risk, putting more than 60% investments in its top 10 holdings.

Still there is a high chance that the space may perform well, if not exceptionally, in the coming trading sessions, especially given the Zacks Industry Rank in the top 34% (see all technology ETFshere).

Investors should also note that Twitter shares occupy about 4.07% in ARK Innovation ETF (ARKK - Free Report) . The fund charges 75 bps in fees. ARKK was down about 1.5% on July 27.

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