Former British Prime Minister Winston Churchill once famously quipped that Russia was “riddle wrapped in a mystery inside an enigma.” The same, it could be argued, is true for Twitter Inc (TWTR).
According to information provided by StatisticBrain, the famous social media platform is among the top 10 most visited websites on the internet, where its 646 million registered users dwarfs that of photo-sharing app Instagram, which has a distant 182 million users. But, where it really counts in the financial markets, Twitter stock falls surprisingly short.
It’s hard to ignore the raw numbers. For the current month, the TWTR stock price is down nearly 12%, despite a strong 2% move yesterday thanks to a patent approval for a “photo-blogging” drone.
Why Twitter Stock Has Been a Laggard
Year to date, TWTR is one of the major laggards in the New York Stock Exchange at -38%. Since its highly anticipated initial public offering back in November 2013, long-term Twitter stockholders have been cut down nearly 46% — 2013 is the only year so far that TWTR stock has provided positive annual returns.
There’s plenty of blame to go around, but a lot of eyes are focusing on TWTR’s chief executive officer, Jack Dorsey, who is also be the head of Square Inc. (SQ), a developer of point-of-sale software applications. Running two major companies is extremely rare, with only a small handful known to have successfully undertaken such a feat.
The precedent includes iconic business leaders such as Warren Buffett and the late Steve Jobs. For the latter, the endeavor of leading both Apple Inc. (AAPL) and Pixar, owned by Walt Disney Co. (DIS), took a tremendous personal and physical toll, resulting in a number of health scares.
Of course, there’s an anecdotal element to the cautionary tale of biting off more than one can chew, yet there’s nothing subjective about worrying investor sentiment for Twitter stock. Roughly 12% of TWTR’s float — or the number of shares readily available for public trading — are held short. In and of itself, this figure may not mean much, but when compared to the short float of social media rivals Facebook Inc (FB) and LinkedIn Corp (LNKD), standing at about 1.23% and 3.3%, respectively, some question marks exist.
Typically, this may suggest either that the TWTR stock price will move further down, or that shareholders who maintain large positions in TWTR are protecting their profits by hedging against potential volatility.
Either way, the signs are not encouraging for the bulls. As if to add fuel to the fire, Dorsey’s other company, Square, has an eyebrow-raising short float of 19%. Not coincidentally, SQ stock’s highest closing price up to this point occurred on the day of its IPO.
More Problems for the Future of Twitter Stock
Further problems for Twitter stock may come in the form of heightened expectations. Based on previous years of outperformance, Wall Street consensus on top-line sales for fiscal year 2016 is $3.1 billion. That’s a fairly tall order, considering that trailing 12-month revenue for TWTR is just slightly under $2 billion.
Additionally, revenue growth has dramatically subsided recently. For both FY2013 and FY2014, sales increased by a little over 100%. This year — assuming revenue meets forecast — will see about 57% growth. A robust figure, definitely, but clearly the initial burst of momentum has died down.
This plays into the other nagging criticism of TWTR in that the company is not doing enough to grow its user base, and thus, its revenue potential. The number of TWTR’s active users is approximately 300 million, which is good, but not good enough when compared to the 1.4 billion people who log into their Facebook accounts at least once per month.
Seeing as how FB stock has been rapidly approaching the 200% mark since its IPO, there’s a reason why its short float is dramatically lower than that of Twitter stock.
Bottom Line for TWTR Stock
Naturally, these uphill challenges must be countered with a clear and innovative strategy. That can only happen when a company’s leadership team is wholly devoted to its continued growth and success. Even the greatest minds in business have had enormous difficulty traversing dual responsibilities at the helm.
Indeed, Twitter stockholders saw an early lift in the markets, but in to regain its original magic, there must be total commitment at the top. Until that happens, the TWTR stock price may see further trouble.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
