This Stock Is Flashing a Rare Buying Opportunity

The media is making a big deal over the fact that Donald Trump’s Twitter account was the platform’s sixth most-followed account with around 88 million followers.

That’s a hefty portion of Twitter’s daily active users. And many expect Twitter Inc. (NYSE: TWTR) stock to take a revenue hit from dropping one of its most-followed accounts.

However, there’s something missing from that narrative…

If you’re not familiar with Twitter’s business model, the company makes most of its money from advertising. That means, when advertisers are happy, Twitter is happy.

Advertisers were apparently not happy with the president. “Trump” was the second most-blocked keyword by advertisers last year. It was second to “coronavirus.”

Still, on Monday, the stock sold off as conservatives sought alternative social media. It was down 9.8% from Friday and continues to face downward pressure.

Here’s why this might be a great opportunity to buy Twitter stock…

Why Twitter Stock Is Really Down

For better or worse, social media is part of the political process in the United States. Conservative politicians and activists cannot afford to drop out of these “public squares.”

There do not appear to be enough alternatives to leading social media sites like Twitter and Facebook Inc. (NASDAQ: FB) for either app to suffer a huge decline in its user base.

In fact, President Trump’s Twitter reach became is a selling point for politically motivated users to stay engaged.

We are probably going to see at least some tweaks to the regulations surrounding Internet content. Congress loves a good hearing, especially on a juicy target like Internet reform. Any changes in oversight or possible penalties should not be severe enough to cause lasting damage here in the United States.

Overseas could be a different matter. Both the German and French governments are not pleased with the banning and blocking of free speech. Angel Merkel of Germany said that blocking speech should be up to legislators, not social media CEOs.

That would seem to ignore the fact that shareholders, not governments, own the social media companies. Still, we can expect to hear more from European governments on Internet regulation in 2021.

That’s potentially an issue for Twitter as they do significant non-U.S. revenue. International users add up to 262 million, or 70% of the company’s 340 million users.

Uganda has also decided to block both Facebook and Twitter ahead of its elections.

None of this helps Twitter. But it’s also not likely to kill it.

In fact, this could create an opportunity to buy Twitter stock at a massive discount…

Silver Lining Ahead for Twitter Stock

Twitter badly needs to expand beyond the core platform. But attempts so far have been less than successful.

Last year, the company came under fire from activist investor Elliott Management for its inability to construct a runway to growth.

That dispute was eventually settled, with Elliott getting a seat on the board. As part of the deal, Twitter also allowed venture capital firm Silver Lake to invest $1 billion and gain a board seat. It has also promised to find another independent board member.

The cease-fire with Elliott is over in late January. We could still see another call to remove Jack Dorsey as CEO and install new leadership at Twitter.

From a purely technical perspective, the Trump-inspired selling has flipped Twitter’s chart from mostly positive to mostly negative.

The initial blocking of the president’s account started selling that took the price below the 20-day moving average last week. Monday’s selling pushed the stock down to the 50-day moving average level.

There is visible support for the stock below $48, until we get down to about $40. Right below that is the 200-day MA, which should provide significant support.

In the near term, we may see some people leave Twitter. That makes for terrible headlines, but we probably won’t see many advertisers leave the platform, and some may even increase their ad spend now that Trump is off the platform.

From a long-term perspective, Twitter’s future has very little to do with Donald Trump. Political activists and conservative politicians may make a lot of noise in the short run, but they aren’t going anywhere.

The users that do leave permanently are not the ones that advertisers want to see on the platform, so they will be no loss to Twitter.

The stock’s future will be determined by how successful Twitter is at developing new ways to monetize its daily users.

Elliott Management and Silver Lake will have a significant voice in what Twitter looks like down the road.

The right way to approach Twitter right now is to wait and see if Trump-inspired selling pushes the stock down into that $40 area.

That would appear to be a much lower-risk entry point to potentially profit from the activist shake-up over the next few months.

— Money Morning Staff

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Source: Money Morning