IPO Renaissance IPO

On Wednesday, Twitter (TWTR) had its first-ever public earnings announcement, highlighting the company’s performance in the fourth quarter of 2013. The company saw a huge drop in its share price despite comfortably surpassing the consensus estimates on both lines and issuing above-consensus guidance for the coming periods. The lower-than-expected user growth appears to be the culprit for the slump, and was what investors really tweeted about following this report.
 
Q4 in Focus
 
The company finished the year with average 241 million monthly users, up 4% quarter on quarter. Notably, user growth steadily decelerated over the year. Twitter recorded user growth of 10%, 7%, and 6% during the first three quarters of the year, respectively. The rate was the slowest in 4Q13 since Twitter began unveiling its user figures.
 
If this was not enough, timeline views also declined persistently through 2013 to about 148 billion in 4Q13, down 7% quarter on quarter. The rate of growth in timeline views was 16%, 11% and 5% in the first three quarters of the year, respectively. 
 
The waning trend signals that users are refreshing their twitter accounts less often. The trend was more sluggish with international users (read: Is the Social Media ETF Losing Its Luster?).
 
Market Impact
 
The underperformances in two major metrics of a social networking company are self-explanatory for the shares’ poor run in the after hour trade. Soon after the inaugural earnings release, shares fell 0.53% and then plunged 17.90% in after hours trading on about 6% elevated volume.

Ahead of the closing bell, Twitter stock was up 43% since its IPO in early November, though much of this looks to be erased as TWTR was still trending lower by about 20% in Thursday’s session (read: Twitter Volatility Puts These ETFs in Focus).
 
Though Twitter does not have sizable exposure in the overall ETF world with only two ETFs Global X Social Media Index ETF (SOCL) and Renaissance IPO ETF (IPO) having, respectively, 6.33% and 3.64% exposure at present, we believe such a massive decline in one of the component stocks should highlight the performance of the duo.  
 
In fact, the Twitter earnings can work as a cornerstone in the overall social media industry, thus impacting the funds greatly. Below, we have highlighted these two funds in detail.
 
SOCL in Focus
 
SOCL focuses in on companies across the globe that are engaged in some aspect of the social media industry. The fund tracks Solactive Social Media Index and invests $134.0 million of assets in 27 holdings. The in-focus Twitter has takes the fifth spot in the fund.
 
SOCL has company-specific concentration risk putting more than 70% of investments in its top 10 holdings. The product charges 65 bps in annual fees. SOCL lost nearly 1.79% year to date (as of February 6, 2014) and fell 0.71% in February 5^th trading.
 
SOCL has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘High’ risk outlook
 
Renaissance IPO ETF (IPO)

IPO – as the ticker suggests – targets initial public offerings in the U.S. markets for its exposure. The fund holds 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 a new entrant in the market, it easily made a place in IPO.

Holding 61 securities in its basket, IPO has amassed an asset base of about $25.4 million. IPO charges 60 bps in fees. Here also, Twitter holds the fifth position with 3.64% of exposure.

The fund doesn’t have any particular sector focus. In both of the ETFs, SOCL and IPO, the top spot is occupied by Facebook (FB) with more than 11% of assets. IPO is down 1.3% in the year-to-date frame and shed 0.48% at the close on February 5 (read: 3 ETFs to Buy on Great Facebook Earnings).

Bottom Line
 
While social media is surely a high growth area, steep competition, and evolving changes in user preference as well as the consequent progress in offerings by various players might pose threats to Twitter and their growth story.
 
At present, Twitter’s earnings picture is decent, swinging back from loss to profit but the underlying indicators have consistently been lacking luster. Investors started to discuss whether Twitter has lost its appeal to users. Also, during the IPO, Twitter was a bit over-valued as believed by many analysts, and will likely head for a sharp correction on any bad news (read: Twitter Volatility Puts These ETFs in Focus).
 
It’s just that the company needs to push itself more on improving its key metrics. At the current level, Twitter is sitting on the fence and its future course needs to be monitored closely. Twitter carries a Zacks Rank #3 (Hold), and thus the earnings estimate picture is pretty uncertain for now.
 
Having said this, if one still wants some exposure to Twitter, but looks to refrain from making a big bet on the firm, either of the two ETFs discussed above might be interesting picks.
 
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RENAIS-IPO ETF (IPO): ETF Research Reports
 
GLBL-X SOCL MDA (SOCL): ETF Research Reports
 
TWITTER INC (TWTR): Free Stock Analysis Report
 
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