When Twitter Inc (TWTR) came public in November 2013, things looked promising. On the first day of trading, the stock shot up 72%.
But since then, Twitter stock has been mostly on a downward spiral. During the past year, the shares are off a grueling 47%. This compares to a 43% gain for Facebook Inc (FB) and 10% return for LinkedIn Corp (LNKD).
Yet perhaps this is an opportunity for investors? Maybe this is a good entry point to buy a social media leader?
Let’s take a look at the pros and cons of buying TWTR:
Twitter Stock Pros
Powerful real-time platform: When it comes to getting instant information about an event, TWTR is the place to go. There are roughly 500 million tweets per day. What’s more, traditional media organizations like the BBC and CNN use Twitter heavily when reporting news stories. But Twitter also is a place where influential people, world leaders, athletes, journalists and celebrities communicate with their own audience and fans. And the scale can be enormous. Consider that Katy Perry has more than 62 million followers! Twitter is also changing the nature of media consumption, such as with the “two screen” phenomenon. This is when someone tweets while watching a television show or movie. No doubt, this can be an effective way for companies to advertise.
Mobile: Since its founding in 2006, TWTR has been a mobile company. After all, the 140-character limit was based on the SMS requirements for mobile phones. But TWTR is not resting on its laurels. It continues to be aggressive in building its mobile infrastructure. To this end, the company recently launched Fabric — a service that allows third parties to make mobile apps, such as with providing components for logins, storage and analytics. If successful, this could help built a powerful ecosystem and also make it easier to deliver ad impressions.
Monetization: TWTR has been showing lots of momentum with revenue generation. In the latest quarter, revenues surged by 114% to $361 million and adjusted earnings before interest, taxes, depreciation and amortization came to $68 million, up from $9 million in the same period a year ago. Mobile advertising accounted for about 85% of total revenues. But the strength should continue. Let’s face it, there are huge opportunities in foreign markets. In the Q3, TWTR posted $121 million in foreign sales, up 176%.
Twitter Stock Cons
Drama: Back in 2010, Dick Costolo came in as CEO after co-founder Ev Williams was ousted. The hope was that he could bring “adult supervision” to TWTR, similar to what Eric Schmidt did at Google Inc (GOOG). But the drama has not stopped. Last year, TWTR has seen wrenching changes in the C-Suite, such as with the departures of Daniel Graf, vice president of product; Ali Rowghani, chief operating officer; Mike Gupta, chief financial officer; and Chris Fry, senior vice president of engineering. For a newly public company, these kinds of changes are not easy to manage — and can make it tough to keep up the growth ramp. OK, so why all the problems with turnover? It is far from clear. But one theory is Costolo has not had a clear vision for TWTR (a stinging profile in the Wall Street Journal highlights this). This certainly seems to be the case when you listen to his interviews or conference calls, which tend to be rambling.
User Growth: In Q3, TWTR posted a 23% gain in users to 284 million. Yet it was still below the Wall Street estimate of 288 million. The fact is that TWTR has had a tough time getting people to sign up for the service. Actually, could be feeling some competitive pressures, such as from Facebook’s Instagram. For the first nine months of 2014, the user base surged by 50% to 300 million. In fact, according to a post on Wired, it looks like Instagram is becoming a place for real-time news!
Valuation: Even with the drop in Twitter stock, the valuation is far from cheap. The forward price-to-earnings ratio is 107X, which compares to 41X for Facebook and 82X for LinkedIn. Even TWTR’s executives are dumping stock. In December, insiders sold 1.2 million shares.
Verdict on Twitter Stock
TWTR does have lots of advantages. By being the dominant real-time communications network, it has lots of opportunities for monetization.
Yet there are many nagging issues. The drama in in the C-Suite is worrisome and could hamper growth. In the meantime, there is serious competition, especially from Instagram. Even Snapchat could be a threat. By being private, the service may be more attractive for users to broadcast real-time information.
Besides, the user information of TWTR may not be as valuable to advertisers. After all, the company really does not collect much personal information — instead, the focus is mainly on interests. This may mean that targeting is not as effective, such as compared to Facebook.
So should you buy Twitter stock? Not now — the risks are just too big when compared to the high valuation.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
