by Tom Taulli | February 4, 2014 6:15 am
While the Global X Social Media Index ETF (SOCL) has posted a 50% rise over the past year, it has been a volatile ride. There was an 11% drop in late October and 9% fall during the first part of this year. In other words, SOCL really isn’t for the faint of heart — and it’s a good bet that the volatility will continue.
No doubt, the ETF is an effective way to tap into the social media mega trend. And yes, it also ties into mobile. Some of the top holdings of the ETF include Google (GOOG), Facebook (FB), LinkedIn (LNKD), Twitter (TWTR) and Pandora (P).
While it’s true that social media remains a growth business — with a big boost from mobile — there could be some headwinds, especially for U.S.-based operators. They are coming under scrutiny because of the NSA scandal, which could make it tough to crank up user momentum in foreign markets. There are also mounting competitive pressures, such as in Asia, including Line and WeChat.
But there are also indications that smartphone growth may be slackening, which would weigh heavily on SOCL. Take a look at Apple’s (AAPL) latest earnings report. The company shipped 51 million iPhones, short of Wall Street expected 55 million. There was also weakness from Samsung and LG.
Oh and then there’s Yahoo (YHOO), which has made heavy investments in mobile. While this has resulted in amassing a user base of more than 400 million monthly uniques, it has been tough to monetize. On the latest earnings call, CEO Marissa Mayer noted: “our mobile revenue is still not material.” That’s bad news for YHOO stock and SOCL.
Now it’s true that Facebook posted a blow-out earnings report that boosted the value of SOCL. Yet the company is fairly unique, in terms of its massive user base and treasure trove of data. What’s more, FB stock is already fetching a hefty valuation. It’s forward price-to-earnings ratio is 37X, which compares to Apple’s 10X and Google’s 18X.
And FB stock is not alone. After all, LinkedIn is trading at a nose-bleed multiple of 97X and Yelp is at whopping 441X. Then there is TWTR stock, which doesn’t even have an earnings multiple!
But keep in mind that TWTR will report its earnings on Wednesday and LNKD will report on Thursday. And if either stock misses, there will be some serious downward pressure on SOCL. LNKD represents 9% of SOCL assets, and TWTR is another 6%.
So for those looking to benefit from the social/mobile wave, it may be best to wait a while. You might be able to get SOCL at a discount, especially in light of the ETF’s volatility.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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