It must seem like insult to injury for Twitter (TWTR) stock owners to sit and watch Facebook (FB) shares jump more than 15.5% to near all-time highs following the company’s big Q4 earnings beat. Fairly or unfairly, TWTR and Facebook will likely always be paired together in the public’s mind as the two most popular and recognizable faces of the social media movement.
However, the two stocks could not be more different in terms of their relatively short public histories. Facebook’s highly-publicized IPO debacle is now long forgotten, and early marketplace buyers of FB stock are now sitting on gains upwards of 150%. TWTR stock is now sitting near an all-time low, down more than 75% from its opening price of 2014.
Market sentiment surrounding Twitter stock is now at an all-time low, but is there any reason at all to expect a comeback?
What Is Wrong With Twitter?
Investing 101 tells us that the primary goal of any company is profits, or earnings. That’s why earnings per share (EPS) and price-to-earnings ratio (PE) are fundamental ways of evaluating the value of a stock. However, in recent years, the market has been ignoring traditional valuation metrics for a handful of exceptional stocks. When it comes to Facebook, Twitter, Amazon.com (AMZN) and Netflix (NFLX), the market seems to have only one obsession: user growth.
A quick glance at the earnings per share of these four tech giants shows four lackluster performances in recent years. However, one look at share price performance tells a completely different story.
So why is it that TWTR stock has been punished while these other names have been market leaders? Growth. Specifically, user growth. This graph of Twitter’s sequential monthly active user growth in recent years looks surprisingly like a chart of its stock price.
Add to the mix a parade of recent executive departures, and you’ve got a recipe for all-time lows.
The Lone Exception
However, Bloomberg columnist Shira Ovide recently pointed out one reason for Twitter shareholders to remain hopeful in such a bleak environment: a different kind of growth.
“Out of more than 100 technology companies with at least $2 billion in revenue over the last 12 months, just one had a faster pace of revenue growth than Twitter in the most recent quarter,” Ovide wrote.
She added that TWTR has been growing revenue at a faster pace than high-growth tech rivals Facebook, Amazon, and Netflix, though acknowledged that it is much more difficult for these larger companies to maintain higher growth rates.
If Twitter can maintain its market-leading revenue growth rate and, more importantly, eventually figure out a way to turn that revenue growth into earnings growth, there may yet be hope for the TWTR stock price.
A Silver Lining To Slumping Share Prices
While this type of transformative turnaround is certainly a long-term possibility for Twitter, the stock’s horrendous fall has actually produced a silver lining for those who have been on the sidelines thus far. At under $17/share, Twitter has actually become an attractive buyout candidate at this point. The Wall Street Journal’s Miriam Gottfried recently named Alphabet Inc (GOOGL), Time Warner Inc (TWX) and Twenty-First Century Fox Inc (FOXA) as three companies that might now be interested in buying out Twitter all-together at these prices. This type of buyout deal could come at a generous premium to current market value and could be an overnight answer to TWTR stock’s recent woes.
The Bottom Line
Twitter has become a global sensation, and, like Facebook, it has been an overwhelming success in leading the social media revolution. If the company continues to grow revenue and maintains its current valuation, TWTR stock may ultimately still prove to be as big of a long-term market success as Facebook as well.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
