Twitter Inc (TWTR): The Long Case for Twitter Stock

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Generally speaking, I have not been a fan of Twitter Inc (NYSE:TWTR) as a business. I even have reservations with it as a user platform.

TWTR twitter stock price twitter

And yet … Twitter stock has fallen so far that I think it is seriously worth considering it as a long play for your portfolio.

An important thing to note: I don’t think Twitter stock an investment so much as a trade, but it could prove to be an extremely profitable trade with very little downside risk.

At its peak, Twitter stock traded near $70. Today, TWTR sits at fresh all-time lows around $20.

The decline hasn’t been unjustified.

While Facebook Inc (NASDAQ:FB) has been able to monetize its platform into advertising (although it remains insanely overvalued and should be shorted), the same can’t be said for Twitter. It has lost money every year, and has just under $2 billion in TTM revenue. Ironically, Facebook stock trades at 18 times revenue while Twitter stock trades at a 7.5 multiple.

Why Twitter Stock Might Not Be All That Bad

Twitter, however, has utility that Facebook does not. Even though TWTR doesn’t solve a problem, making it of little value as a long term investment in its present form, its 140-character format makes it ideal for certain subject matter: politics, comedy, hobbies, brands, public events, global media topics and sports commentary.

The Pew Research Center tracked how Twitter is used among people, and the important conclusion is that people essentially comment within clusters of people with the same view.

I believe 2016 is going to see increased usage in Twitter, mostly due to the upcoming presidential election, the rise of Middle East instability and the continued growth in “things people care and tweet about” that Pew highlights. This in turn is going to attract advertising dollars, and in a way that I think will exceed TWTR stock’s previous years’ revenue.

You’ll note that I wrote above “in its present form” in regards to TWTR. Apparently, the company is going to roll out a 10,000 character-limit to the platform. Many folks are already saying it won’t work. I disagree. There’s nothing that stops people from continuing to use 140 characters. Longer messages encourage people to stay on the platform longer to compose the messages, and to read them. That in turn increases advertising value.

Longer messages also are an enhancement to the experience. While it will undermine the creativity necessary to compose a really brilliant or comical tweet, it will allow for micro-blogging that still is more easily composed and accessible than any other format. That will permit even more substance to be added.

I actually think anyone who can compose a really smart 25- to 75-word commentary on a topic of value will continue to see significant engagement.

Yet all of this is ultimately trivial to what I see as the biggest reason for a long trade.

Somebody is going to buy Twitter, and that company will pay a stupidly ginormous amount of money for it. The price is now low enough that the premium will be large.

No matter what Twitter’s ultimate utility may be, the fact is that it has 320 million active monthly users — just more than the entire U.S. population. That vastly exceeds the number of people any television network show reaches in an entire season –and I’m talking broadcast network, not limited cable network.

307 million aggregated users is worth a lot to someone, and they will overpay for that access.

Look at some of the stupid Internet deals we’ve seen. Priceline Group Inc (PCLN) paid $2.6 billion for OpenTable, which had a mere $22 million in annual net income. Facebook blew $19 billion on WhatsApp, which had no advertising revenue. Yahoo! Inc. (YHOO) bought Tumblr for $1.1 billion and yet was only expected to make $100 million in revenue in 2015.

Despite nobody having any real clue about how Twitter will monetize going forward, everyone does know its 307 million users are worth something, and that 2016 is going to be a big year of engagement.

You can buy in at an all-time low and, I believe, will do no worse than breaking even over the long-term when a deal happens.

And it will happen.

On the upside, a buyout could happen in the high $30s, which would give it a valuation around 13 times sales.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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