Social-Media Rout Crushing ETF That Rallied 64% in 2013Joseph Ciolli and Trista Kelley
The rout in social media stocks is burning investors who piled into one of last year’s most popular exchange-traded funds.
The Global X Social Media ETF, which saw assets rise 10-fold last year, sank 2.7 percent yesterday, bringing its decline from April 23 to 12 percent. Among its holdings, Twitter Inc. is down 33 percent over the period, while Yelp Inc. lost 18 percent and Pandora Media Inc. slipped 21 percent. Almost 400,000 Twitter options changed hands yesterday and about 600,000 the day before as traders rushed to hedge against more losses.
Social media companies have fallen eight of the past 11 days amid concern that user growth is slowing and valuations are excessive after last year’s 64 percent rally. Twitter, the San Francisco-based short-message service, is trading a record low after insiders were set free this week to sell equity that had been locked up since initial offering.
“You’ve had this market that’s had a very good run for the last five years or so and you’ve had investors get very comfortable with risk, until recently,” Kevin Caron, a Florham Park, New Jersey-based market strategist at Stifel Nicolaus & Co., which manages about $160 billion, said in a phone interview. “The momentum has faded.”
About $2.3 million was pulled from the Social Media ETF last month, the first withdrawal since June, data compiled by Bloomberg show. The 30-stock security had assets of $125 million in December, compared with $12 million at the end of 2012.
The combined market capitalization of Twitter, LinkedIn Corp., Facebook Inc., Pandora, Yelp and Groupon Inc. reached $195.1 billion yesterday, the lowest level this year, according to data compiled by Bloomberg. The group has lost $17.7 billion in total equity value over the last two sessions. On May 6, the companies saw their biggest single-day drop since at least November.
Twitter shares plunged even after early investors Chris Sacca and Rizvi Traverse Management LLC pledged not to sell in a sign of confidence in the company. Chief Executive Officer Dick Costolo and co-founders Evan Williams and Jack Dorsey also said they are hanging onto their stock.
“People have no excuse to be long at this point,” said Ben Kelly, an analyst at Louis Capital Markets LP in London. “The growth isn’t great. They’re not growing at all, in fact, so everyone’s starting to think: Is this the saturation point now? And now there’s a pile-on.”
The Chicago Board Options Exchange NDX Volatility Index, which tracks options on the Nasdaq 100 Index, rose 0.1 percent to 17.42 at the close in New York today. The gauge, which tends to rise as stocks fall, rose 13 percent this year through yesterday.
Puts on Twitter make up three of the top four options with the highest ownership, data compiled by Bloomberg show. The most-active contracts yesterday were puts with a $30 strike price expiring at the end of the week. The security has risen in value to 45 cents, compared with 2 cents on May 2.
Even after the declines, Twitter shares still trade at more than 800 times estimated earnings for this year, making it the fourth-most expensive company in the Russell 1000 Index. The company said in April that membership in the first quarter reached 255 million, with year-over-year growth decelerating to 25 percent from 30 percent in the previous period.
Social media and Internet shares are among the most expensive in the U.S. stock market. Pandora trades at 137 times estimated profit and LinkedIn has a multiple of 87. Both have slumped at least 16 percent this year.
“Eventually the fundamentals will take over and drive the performance of the stock,” said Caron of Stifel Nicolaus. “Every company that comes out as a hot IPO eventually has to grow into a valuation that makes sense at a more mature stage.”
Twitter shares that have been borrowed and sold on expectations of declines make up 6.7 percent of outstanding stock, the highest since its initial public offering, according to data from Markit. The stock is down 52 percent this year after the company reported slowing user growth, raising concern that it may not be able to add more members.
“People who are invested across the sector unceremoniously dumped stock in similar companies on the Twitter lock-up expiry,” said Ioan Smith, managing director at KCG Europe Ltd. in London, in a phone interview on May 7. “Twitter lockup traded as a theme across the sector. There is a huge chance that the activity we saw in puts is people buying protection.”
Selling in one of the biggest initial offerings of 2013 came as Alibaba Group Holding Ltd. filed what may be the largest U.S. IPO of all time. The company and shareholder Yahoo! Inc. might raise as much as $20 billion and get a market valuation of $168 billion, more than 95 percent of the S&P 500, data and analyst estimates compiled by Bloomberg show.
Yahoo dropped 6.6 percent to $34.07, the second-biggest drag on the Nasdaq 100 behind Whole Foods Market Inc. While it’s too soon for managers to be considering allocations in Alibaba, at some point the market will have to make room for the Chinese e-commerce company, according to Alan Gayle, who helps oversee about $50 billion as a senior strategist at RidgeWorth Capital Management.
“My guess is that analysts are still sharpening their pencils on this, and it’s probably a little bit early for the traders to get involved,” Gayle said in a telephone interview from Atlanta. “But now that the IPO has been announced, it will be big and garner a lot of interest and dollars, and those dollars have to come from somewhere.”