ETFs: The Better Way to Play Facebook?
The second Friday of Facebook's (Nasdaq: FB) infancy as a public company is marked by another important event. Fortunately, it doesn't involve a bungled share offering that drew the ire of investors and market makers alike. Rather, today is the first day that the social media giant sees its badly bruised shares trade in an ETF.
As Benzinga reported on Thursday, the index tracked by the Global X Social Media Index ETF (Nasdaq: SOCL) added Facebook with an allocation of 8.8%. Within the ETF itself, Facebook's weight is 8.79%, making it the fund's third-largest holding behind LinkedIn (NYSE: LNKD) and China's Tencent Holdings, according to Global X data.
With all the controversy, consternation and questions surrounding Facebook, the company's arguably still-excessive valuation along with its ability to monetize the mobile business, ETFs such as SOCL rather than single stocks may be the smarter way of playing the social media group.
"There still should be downward pressure on Facebook," said Street One Financial President Scott Freeze in an interview with Benzinga. "The ETFs limit single-stock risk and provide a smart way to play Facebook." Freeze has a $25 price target on Facebook, which is well below where the shares currently reside.
Another potential ETF destination for Facebook is the First Trust US IPO Index Fund (NYSE: FPX). That $17.3 million ETF with 99 stocks could see its index add Facebook as soon as May 25. Regarding FPX, it should be noted that several of its top holdings are by no means "new" stocks. Visa (NYSE: V), Philip Morris (NYSE: PM) and General Motors (NYSE: GM) combine for 28% of that ETF's weight.
Speaking of GM, the auto giant recently announced it will halt advertising on Facebook, something Freeze views as an ominous sign.
"Facebook has no incremental revenue," Freeze noted. "If companies like GM see no benefit to advertising on Facebook, that's a bad sign. Facebook has lost one of the biggest advertisers in the world."
The upside to ETFs such as SOCL in particular, and to a lesser extent, FPX, assuming Facebook does enter that fund, is that they mitigate the risks of single-stock exposure. Freeze uses the analogy of Apple's (Nasdaq: AAPL) massive weight within the PowerShares QQQ (Nasdaq: QQQ) and the Technology Select Sector SPDR (NYSE: XLK), noting Facebook won't dominate SOCL the way Apple does QQQ and XLK.
SOCL and other ETFs may also prove useful in terms of insulating investors from Facebook's rising short interest,which Freeze noted is already up to 8%. He said it wouldn't be surprising to see Facebook's short interest at "20% in a month."
"SOCL can help protect investors against rising short interest and give investors some upside in the event of a short squeeze," said Freeze. "Within social media, we haven't seen who can monetize and generate substantial revenue. Are you going to pick the one stock that does? ETFs give you upside whole countering the negativity from social media stocks."
SOCL, which has lost over 5% since Facebook's debut, could stall a bit in the near-term unless the social media darling can start impressing investors because now that Facebook is public, it could be a while before the next marquee social media IPO comes to pass. Twitter is the logical answer, but that probably won't happen in the next 90-180 days.
"FPX and SOCL are the more artistic, educated social media plays," Freeze said. "SOCL's not a fast-money play. I don't think we'll see it average 200,000 shares per day, but it should hold steady and be the broader-based social media play." SOCL's current average daily volume is just over 50,300 shares.
Still, thing are by no means perfect with Facebook, as Freeze eloquently pointed out.
"Facebook's issues aren't Amazon's (Nasdaq: AMZN) issues from the 1990s," he said. "Facebook doesn't sell anything. There's nothing to say Facebook won't be Myspace in two years."
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