Twitter Hit by Weak Guidance: Buy the Dip With ETFs?
The social media space came under pressure on Feb 7 owing to Twitter Inc.’s TWTR downbeat guidance. Quarterly earnings for the fourth quarter beat estimates but a weak revenue guidance and probability of increased costs in 2019 vexed investors.
Shares nosedived, losing about 10% in the key trading session on Feb 7.
Results in Detail
Non-GAAP earnings of 31 cents per share outpaced the Zacks Consensus Estimate by 6 cents. The figure soared 63.2% from the year-ago quarter. Revenues of $909 million increased 26% at constant currency (cc) from the year-ago quarter and comfortably surpassed the consensus mark of $869 million.
U.S. revenues (56% of revenues) increased 24% year over year to $505.6 million. International revenues (44.2% of revenues) rose 27% at cc and on a year-over-year basis to $403.2 million.
Average monetizable daily active users (mDAU) were 126 million in the reported quarter, compared with 115 million in the year-ago quarter and 124 million in the previous quarter. Twitter’s average monthly active users (MAUs) totaled 321 million, down from 330 million in the year-ago quarter and 326 million in the preceding quarter.
Inside the Muted Outlook
Twitter expects first-quarter 2019 total revenues between $715 million and $775 million. At mid-point, the guidance is lower than the current Zacks Consensus Estimate of $762.5 billion. Also, the company said that it expects expenses to rise 20% this year.
What Lies Ahead?
The stock belongs to a top-ranked Zacks industry (top 12%) and sector (top 25%). The reason for the projection of higher expenses is initiatives adopted across "health, conversation, revenue product and sales, and platform."
The stock is decently valued with P/E for the forward year at 35x compared with 166.2x P/E of the Internet software market and in line with the peer group multiple of 34.92x. Price/book value of the stock was 3.6x versus 6.4x of the Internet software market and 6.85x multiple of the peer group.
So, gutsy investors can use the recent selloff as a buying point and cautious investors may wait for some time and look for better entry points. The company’s long-term prospects look positive though short-term hurdles exist. If an investor finds it too risky to bet on Twitter now, the ETF route can be taken as the basket approach lowers company-specific concentration risks.
ETFs in Focus
Twitter’s results will likely have a considerable impact on Global X Social Media ETF SOCL. The company takes about 10.4% of SOCL, holding the third position. As a result, the company’s performance is crucial to the entire social media sector.
The product charges 65 bps in annual fees. SOCL has company-specific concentration risk, putting more than 60% investments in its top 10 holdings. The fund was down 2.9% on Feb 7.
Facebook FB — the fund’s second holding — came up with huge revenue and earnings beats for its fourth-quarter 2018 results released at January-end. Facebook’s strength could make up for the Twitter’s weakness (read: Facebook Jumps on Solid Q4 Results: ETFs Set to Surge).
Another ETF that will be impacted by Twitter’s earnings is Invesco Dynamic Media ETF PBS. Twitter takes about 5.47% of the fund, which lost about 0.6% on Feb 7. The stock also has 4.51% weight in ARK Innovation ETF ARKK , which was down 3.3% on the day (see all Technology ETFs here).
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