The last thing any investor should do is own Twitter Inc. (TWTR) into earnings.
There’s nothing but pain involved.
Case in point: Following the company’s earnings report on Tuesday evening, the stock got smashed yesterday, tanking by over 16%. It marked the seventh time in 10 quarters that shares sold off violently on the heels of quarterly results.
Amazingly, though, a few weeks after every post-earnings drubbing, investors seem to suffer from sudden onset amnesia and start treating the dips as “irresistible” buying opportunities.
Don’t be similarly duped.
Twitter’s problems are real… and its proposed solutions are severely lacking.
And unless a suitor materializes, there’s nothing but more pain ahead for shareholders.
Twitter Users Have Flown the Nest
Let’s run down Twitter’s ugly list of problems…
Right off the bat, there’s a revolving door of leadership, increased competition, and ghastly high stock compensation expenses.
Oh, and the lack of any profits, too.
But chief among Twitter’s problems is slowing user growth – something that continues to dog the company.
After reporting its first quarterly user base decline in the fourth quarter of 2015, the company mustered up a 1.6% increase this quarter – reaching a total of 310 million monthly active users (MAUs).
That’s a far cry from the company’s early ambitions to build “the largest daily audience in the world.”
Facebook Inc. (FB), which was only founded two years earlier than Twitter, lays claim to that distinction, with 1.6 billion active users.
Perhaps most troubling, however, is the fact that Twitter’s user growth flat-lined in its most lucrative market – the United States.
Time for a Reality Check
Given how Twitter’s economic model of monetizing its user base works – selling advertising to companies for access to it – such stagnation puts a ceiling on revenue growth.
Needless to say, that’s terrible news for a stock that’s still being valued as a “growth” investment.
Anyone who denies such a painful reality is ignoring reality.
The trend in Twitter’s revenue growth over the last four quarters clearly reveals what’s unfolding:
- Q2 2015 – 61%
- Q3 2015 – 58%
- Q4 2015 – 48%
- Q1 2016 – 36%
And based on the low end of management’s current guidance, revenue growth could slow to as little as 17% in the current quarter.
And if faithful advertisers significantly curtail their spending, look out below!
The day of zero revenue growth could befall the company much sooner than any analysts expect. And I believe that’s possible for two reasons:
- Waning Patience: By Twitter’s own admission this quarter, “Revenue came in at the low end of our guidance range because brand marketers didn’t increase spending as quickly as expected in the first quarter.” Translation: Advertisers still aren’t convinced that Twitter is a valuable ad platform. Eventually, they’ll stop trying to figure it out.
- Novelty Preference: As more promising upstart social media platforms like Snapchat grow faster, they’re bound to siphon advertising money away from Twitter, as companies look to try something new.
Naturally, management has a fresh plan to overcome all these challenges. But don’t expect it to come together all A-Team style. Why?
Because the plans don’t include anything remotely transformational.
For instance, on the user growth side, the company plans to deepen engagement through product improvements.
This includes an enhanced timeline, better follow recommendations, better logged-out user experiences, and new direct messaging functionality, per a recent Twitter Investor Relations tweet.
Sounds like nothing but incremental optimizations to me, which won’t do anything to attract new users. Indeed, they’re already completely befuddled by Twitter in its current form.
Or as venture capitalist Benedict Evans laments, “Twitter’s failure ever to delight core users (who’ll never leave) matters less than the fact that it still baffles [the] normal user.”
Likewise, the company’s apparent plan to insist that it’s the platform for “live” events and happenings – management used the word nearly 20 times in this quarter’s shareholder letter – won’t magically attract more users just because they say it more.
Especially since competition is fierce to be the live social media platform of choice. Both Facebook and Snapchat are aggressively spending to bolster live offerings of their own.
On the revenue front, advertisers reportedly want to spend more, but are waiting for new targeting features. Yet CFO Anthony Noto said Twitter isn’t planning to launch those features until the fall.
When there’s money on the table, you need to grab it before it’s gone. As I’ve said before, I fully expect it to disappear, as advertisers grow tired of waiting and of the ineffective results, and instead look for new platforms for their advertising.
In short, as The Verge’s headline proclaims, “Nothing Twitter is doing is working.”
Worse still, none of the company’s recent plans hold much hope of working, either.
So is Twitter doomed to obsolescence?
With a valuable platform of 310 million active users, Twitter’s demise isn’t complete yet. Even if the current management team is doing a terrible job unlocking that value.
That being said, this value continues to erode with each passing quarter, as the company churns through more users and other social media platforms steal market share with newer, more engaging offerings.
Heck, this week, a former Twitter executive (Michael Sippey) launched a new social media platform called Talkshow that could immediately start threatening Twitter.
At this point, Twitter CEO Jack Dorsey’s smartest move would be to find a suitor, before it’s too late.
My money’s still on Alphabet Inc. (GOOGL) ultimately stepping up to purchase Twitter. But that likely won’t happen until the stock drops down even more, closer to $10 per share.
And given Twitter’s lack of full-year guidance, stagnant user growth, lack of profitability, and shrinking ad spending, the potential for a takeover is frankly the only reason to still hold onto the stock.
Fair warning, though: If you suffer another kick in the groin from a post-earnings selloff while you wait for a deal to materialize, you asked for it.
Ahead of the tape,
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Source: Wall Street Daily