Should You Buy Social Media ETF On Solid LinkedIn, Twitter Earnings?

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Includes: FB, MSFT, SOCL, TWTR
by: Zacks Funds

The social media space, once a sharp pain for investors, is likely seeing a reversal. High beta issues and a massive sell-off the year before had made the space decently valued. Then, impressive corporate earnings from many of the companies started brightening the space and the related ETF last quarter. This quarter too seems to have sustained the wining trend.

On February 5, Twitter (NYSE:TWTR) and LinkedIn (LNKD), two extremely well known social media stocks, reported earnings after the bell and both excelled on both lines. Stocks of the Internet giants soared after hours. Their fourth quarter performances are detailed below (read: 3 Internet ETFs Leading the Tech World Higher):

Twitter's Q4 in Detail

Initially, Twitter stock was hit by disappointing user growth despite improved top and bottom lines. But the stock shot up as the company threw light on the one-time reason behind sluggish user growth.

Per Twitter, Apple's (NASDAQ:AAPL) iOS 8 software upgrade encountered an "unforeseen bug," causing a loss of 4 million active users. Otherwise, Twitter would have been able to report 292 million users instead of 288 in the quarter, though the reported figure was up 20% y/y.

Non-GAAP earnings were 12 cents per share (per the company), easily beating the year-ago earnings of 2 cents per share. Revenues of $479 million in the quarter were up 97% year over year and ahead of the Zacks Consensus Estimate of $451 million. Shares were up 9.1% after hours.

LinkedIn's Q4 in Detail

LinkedIn's fourth quarter revenues increased 44% year over year to $643.4 million, surpassing the Zacks Consensus Estimate of $618 million bolstered by its hiring business. The online job services media site posted non-GAAP earnings of 61 cents per share (reported by the company), up from 39 cents in the year-ago quarter. Shares were up 7.7% in the aftermarket session.

If this was not enough, Facebook (NASDAQ:FB) also came up with top and bottom line beats for Q4 in late January. Its adjusted earnings per share came in at 54 cents, ahead of the Zacks Consensus Estimate of 33 cents and up 69% from the year-ago earnings of 32 cents. Revenues climbed 49% year over year to $3.85 billion and surpassed our estimate of $3.79 billion (read: ETFs in Focus on Facebook Earnings Beat & Rising Cost).

Market Impact

The reaction of such stellar results also drove Global X Social Media Index ETF (NASDAQ:SOCL) - a pure play on social media space - higher. The fund, which was up 1.1% on February 5, added about 0.2% after hours, reflecting LNKD and TWTR's performances.

Investors can easily use the recent ascent in the above-mentioned stocks as a buying opportunity of SOCL. Through SOCL, investors can simultaneously be in touch with the most sought after social media companies.

SOCL in Focus

SOCL focuses on companies across the world engaged in some aspect of the social media industry. The fund tracks the Solactive Social Media Index and invests $102.5 million of assets in about 30 holdings. The in-focus LinkedIn takes the second spot in the fund accounting for about 11.85% in the portfolio while Facebook takes the third spot with 9.96% weight and Twitter occupies the tenth spot with 3.96% exposure (read: 3 IBM Proof Tech ETFs for 2015).

SOCL has company-specific concentration risk putting more than 60% of investments in its top 10 holdings. The product charges 65 bps in annual fees. SOCL has added about 3% year to date (as of February 5, 2015).

Though volatility is imminent in this high-tech space thanks to valuation and global growth concerns, there are plenty of sound companies in the space, suggesting that an ETF approach might now be a better way to play the segment. After all, Twitter and LinkedIn hold a solid industry rank (in the top 38%) at the time of writing as per the Zacks Industry Rank, suggesting upside potential for the stock in the coming days.