How to play the mixed results from social media stocks
Michael Fowlkes 02/10/2014
Before the mighty Facebook ( FB ) went public in 2012, Wall Street was very bullish on the sector, since social media plays such a large role in people's lives.
The level of hype surrounding Facebook's public offering was something Wall Street has not seen since Google ( GOOG ) went public, but unfortunately, the first year of trading for Facebook did not go exactly as planned.
The main problem with Facebook, at least at the beginning, was its lack of mobile revenue. Facebook started off as a website that morphed into a mobile site, and analysts doubted whether or not the company would ever be able to grow its mobile ad revenue.
With weakness in Facebook, the entire sector fell out of favor with Wall Street, but luckily for the now ten-year old Facebook, mobile revenue has been growing, and now Wall Street is once again starting to pay attention to the sector as a whole.
During Facebook's most recent quarter, the social media company posted earnings of 31 cents per share, easily topping the 27 analysts expected. The better than expected earnings were nice, but what really got investors excited was the strong growth of mobile revenue. For the first time in Facebook's history, mobile revenue accounted for greater than 50% of the company's total ad revenue. Mobile ad revenue accounted for 53% of all ad revenue during the quarter, up from 23% during the same period last year.
Following Facebook's strong quarter, the stock surged and gave a boost to the entire sector, with analysts finally believing strong mobile ad growth to be possible. This set the stage for other social media giants like LinkedIn ( LNKD ) and Twitter ( TWTR ), however both of these companies failed to produce similar results.
Twitter reported a 117% revenue increase and earnings of $0.02, which outpaced the $0.02 loss analysts had expected. On the surface, you would expect the stock to soar following those results, but despite beating on the top and bottom line, the stock got killed due to concerns over slowing user growth.
LinkedIn, the professional social media site, also ran into some trouble following its earnings report. Like Twitter, LinkedIn posted better than expected earnings and revenue, but that did not keep the stock from trading sharply lower following the report. The concerns were similar to those of Twitter, once again coming down to slowing user growth. It grew users by 6.9% during the quarter, down from 8.8% during the previous quarter.
What we are left with is a string of earnings reports that were better than expected, but stocks getting punished due to concerns over user growth.
With earnings and revenues coming in better than expected for social giants Twitter and LinkedIn, and a blowout quarter for Facebook, it makes sense that Wall Street is once again interested in the sector, but with concerns over user growth, it would also be wise to hedge any trade we make.
A great way to accomplish this would be with a hedged trade on Global X Social Media Index ETF ( SOCL ). This exchange traded fund tracks the social media sector, so you will benefit from strength, but it is also diversified enough over a wide range of social media stocks that you are protected against any weakness that may hit individual stocks in the sector.
Chart courtesy of stockcharts.com
A nice hedged trade on SOCL would be the June 13/18 bull put credit spread. In this trade, you would sell the June 18 put while buying the same number of June 13 puts for a credit of 25 cents. This trade has a target return of 5.3%, which is 14.3% on an annualized basis (for comparison purposes only). SOCL is currently trading at $21.03, so the trade has 13.2% downside protection.