Why did Internet stocks like Facebook fall sharply on July 8?


Jul. 10 2014, Updated 5:00 p.m. ET

The Social Media Index ETF declined 4% on July 8

Although the broader market and tech sector were down yesterday, Internet stocks suffered a far steeper decline. As the chart below shows, Twitter (TWTR) was down 7%, Pandora (P) was down 7%, LinkedIn (LNKD) was down 6%, and Facebook (FB) was down 4%. This decline caused the Social Media Index ETF (SOCL) to fall more than 4%. The Social Media Index ETF is highly exposed to Internet stocks. It has more than 10% holdings in Tencent and Facebook. It also has exposure in high single-digit percentages to LinkedIn, Sina (SINA), and Yandex (YNDX).

Let’s see why Internet stocks suffered so much this past week.

Twitter has some problems to sort out

There was a time when investors believed Twitter would become the next Facebook. Soon after its IPO last year, the stock’s value rose from $45 to $70. But today, the stock’s valued at $37. This is about half of its peak value.

To start with, Twitter has been unable to grow its user base. User base is the lifeline for a social media company. Twitter’s monthly active users of 255 million are about one-fifth of Facebook’s.

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Another issue the company faces is its frequent senior management changes. The chief operating officer, vice president of media, and chief financial officer have either resigned or been forced to transfer to another department or role. These changes happened within less than a year of Twitter’s IPO. These changes suggest all is not well with the company.

Lack of visibility is an issue for Facebook

Facebook has been on an acquisition spree recently. It acquired Instagram last year for $1 billion. More recently, it bought WhatsApp for $19 billion and Oculus VR for $2 billion. But none of these acquisitions are expected to provide Facebook with material revenue contribution in the near future.

Investors don’t like a lack of visibility. Even Facebook’s current online advertising business won’t grow at historical rates. It’s bound to decline in the coming quarters. Facebook’s online advertising business did grow at an impressive year-over-year rate of 82% in the last quarter. But Facebook expects this revenue growth to decline considerably in Q2.

Competition increasing faster than Pandora’s expectations

The Internet radio market has seen lot of consolidation in the last few weeks. Pandora is the market leader in the Internet radio space. But Apple (AAPL), Google (GOOGL), and Spotify all have acquired niche players in the last few weeks in order to grow their businesses inorganically. Plus, Samsung (SSNLF) and Amazon (AMZN) have also entered this market, creating more headaches for Pandora.


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