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Summary

  • Social Media stocks have had a rough year in 2014 as they have been caught up in the technology sell-off.
  • SOCL is greatly overvalued compared to its category average and benchmark. Additionally, it has anemic sales growth and historical earnings.
  • Groupon Inc. and Sina Corporation have helped to spearhead the decline of SOCL.
  • While SOCL may gain momentum in the short term, I do not feel it will be sustained and that its sell-off will continue in the long run.

Similar to the 3-D printing industry, there is no question that the wonderful world of social media is evolving exponentially. Surely, an ETF dedicated to social media is a sure sign of its overall growth. However, 3-D printing stocks and social media stocks have another startling similarity.

Like 3-D printing stocks, social media stocks have had a rough year in 2014. This can be seen in the current performance of the Global X Social Media Index ETF (NASDAQ:SOCL). As of 4/24/14, only 6 out of SOCL's top 25 holdings have generated a positive YTD return. Those holdings are the following:

Xing AG (OTC:XNGAF) = 27.69%

Zynga Inc. (NASDAQ:ZNGA) = 16.32%

Facebook Inc. (NASDAQ:FB) = 12.28%

Renren Inc ADR (NYSE:RENN) = 10.82%

Tencent Holdings Ltd (OTCPK:TCEHY) = 6.96%

Pandora Media Inc. (NYSE:P) = 5.90%

Source: Morningstar

Overall, SOCL is down 12.19% for the year. Compared to its Morningstar benchmark, SOCL has greater portfolio exposure to mid-cap stocks and reduced exposure to giant-cap stocks.

While the Morningstar benchmark has a giant-cap exposure of 55.73%, SOCL has a giant-cap exposure of only 30.70%. Additionally, the Morningstar benchmark has a mid-cap exposure of 17.73%, SOCL had a mid-cap benchmark of 39.68%. Thus, this is a mirror into the inherent risk within the portfolio.

Unsurprisingly, SOCL is quite overvalued. As you'll see in the latest table, SOCL has higher price multiples than the Morningstar benchmark and category average.

Stock Portfolio

Benchmark

Category Avg.

Price-to Earnings Ratio

24.98

17.41

21.69

Price-to Book Ratio

3.91

3.10

3.19

Price-to Sales Ratio

4.48

2.30

2.71

Price-to Cash Flow Ratio

19.31

11.30

11.32

Source: Morningstar

Additionally, the overvaluation of SOCL is also combined with its unproven sales growth and historical earnings that pales in comparison to its Morningstar benchmark and category average.

Stock Portfolio

Benchmark

Category Avg.

Historical Earnings %

1.84

10.44

11.76

Sales Growth %

1.15

8.08

20.91

Source: Morningstar

Thus, it is no wonder why SOCL is susceptible to a steep decline in a volatile market.

It is important to examine the key holdings of SOCL that have led to this steep YTD decline. I chose the following holdings because of their significant YTD decline, as well as the fact that they hold a sizable amount of portfolio weight.

One of those holdings include Twitter Inc. (NYSE:TWTR) with a -29.29% YTD decline. As many of you know, I have done extensive analysis on Twitter, especially with regards to their user-base. Thus, I will refer you to two of my most recent Seeking Alpha articles for analysis on Twitter.

Here are two key holdings that have helped to spearhead the decline:

1. Groupon Inc. (NASDAQ:GRPN)

In spite of its well-documented shift in business strategy, Groupon Inc. continues to feel the pain. The stock is down 37.47% YTD. Even after Groupon Inc. posted fourth-quarter results on February 20th that were stronger than expected, Groupon Inc. fell 13% in after-market trading due to warnings that their acquisitions of Ideeli and Ticket Monster could hurt their bottom line.

Considering that Groupon Inc's bottom line is a sticking point for investors, they have an absolute right to be concerned.

Yet, these two acquisitions are key to Groupon Inc's full-fledged efforts to shift its long-term outlook. Another key aspect is their recent ad campaign centered on their efforts to become an e-commerce business. Like acquisitions, tv ads will cost money and will have an adverse effect on the bottom line. Groupon Inc. is also looking to enhance its warehouse operations to boost efficiency in terms of customer delivery.

With these changes, it appears that Groupon Inc. is willing to take short-term losses in hopes of long-term gains in the future. Until then, it seems that Groupon Inc. investors will have to state the following phrase repetitively a la Jerry Seinfeld's father.

Serenity Now. Serenity Now.

2. SINA Corporation (NASDAQ:SINA)

Sina Corporation is an online media company that serves China as well as Chinese communities across the world. Their digital network consists of Sina.com, Sina.cn and Weibo.com. Sina Corporation is down 33.29% YTD. The rapid decline of Sina's stock was sparked by a two-day sell-off in January. On January 17th 2014, Sina's shares fell after a Chinese government agency announced a 9% decline in Sina Weibo's user base. Additionally, Jeffries downgraded Sina to Hold and dropped their price target by $22 a share.

On February 25th, Sina Corporation's share price fell by 10% to a total of $68.98 due to news of a disappointing growth rate in terms of daily active users for Sina Weibo during the 4th quarter of 2013. Thus, this increased investor uncertainty with regards to Sina's emerging platform at the time. From then on, Sina's stock depreciated to as low as 52.46. As of April 23rd, Sina is trading at $53.27. It will be interesting to see if Sina's stock will benefit from the current momentum of their asset Weibo.

BOTTOM LINE

I do not believe that the current tech sell-off is over and that it could continue to weigh down volatile industries such as social media. As CNBC notes, there are many analysts that expect the recent downslide in social media stocks to continue. According to trend analysis by Market Club, the long-term, medium-term and short-term trends for SOCL are down, down and up respectively.

There is no doubt that SOCL will continue its current momentum in the short-term thanks to stellar earnings from Facebook on Wednesday.

In the long run, I feel that SOCL is vulnerable to a continued sell-off due to the fund's overvaluation and above-average exposure to riskier, mid-cap stocks. I believe that the upward momentum of SOCL will be short-lived and that it's downward trend will continue.

Source: An Analysis Of The Global X Social Media Index ETF