Should You Buy Or Sell Twitter (TWTR) Stock? 3 Pros, 3 Cons

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Twitter (TWTR) is a leading online social network. With more than 300 million monthly users, the company has an extensive platform that it has monetized with increasing success in recent quarters.

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That said, the company has failed to achieve the sorts of returns TWTR stock owners had hoped for, and shares recently took a major hit after disappointing Q1 earnings. Will new management, deals, and the increasing video focus lead TWTR stock higher? Or is the stock best avoided for the time being?

TWTR Stock: Pros

NFL Deal: Twitter recently announced a partnership with the National Football League. The deal comes at low risk but with sizable upside for Twitter. The company will get to live stream ten NFL games for the price of $10 million, or $1 million per game. TWTR will show the same national ads as a regular viewer on broadcast or cable would see. However, Twitter will get to sell ads in the few local ad spots per game that are available.

With both limited cost and direct revenue from ads, you could ask: What’s the big deal? Well, the main attraction is that it should bring in a good number of new users. Twitter has a passionate niche audience, particularly among those that use it as a sort of newsfeed or celebrity tracker. However, it’s struggled to make the jump to the mainstream in the same way that, say, Facebook (FB) has done.

The Thursday Night Football games that Twitter has rights to bring in 17 million viewers weekly. If even 10% of those check out Twitter’s live stream, that’s a fairly low cost to attract potential new users, particularly since Twitter can defray much of the cost by selling some ads during the local spots. Additionally, this positions TWTR well to benefit from cord-cutting; as more people abandon pay-TV, the free online option will become more and more desirable.

Strong Balance Sheet: TWTR stock is backed up by more than $3.5 billion in cash. Subtracting the $1.5 billion in debt, the company has roughly $2 billion in net cash. And despite not being profitable (on a GAAP basis) in 2015, the company produced $383 million in operating cash flow and was free cash flow-positive last year.

While the company isn’t profitable at the moment, it has a great financial position. Twitter has plenty of time and financial capacity to search for deals and opportunities that will keep the company viable for many years to come.

Buyout Target?: There’s been a good deal of discussion about the possibility of Alphabet (GOOG, GOOGL) buying Twitter. At an enterprise value of $8.2 billion plus premium, it’d easily be within Alphabet’s ability to pull off a deal for TWTR stock.

Alphabet has been struggling to get a strong social presence. While its properties dominate much of the net, social has always been a weak point. Anyone remember Google+? There’d potentially be particularly useful synergies between Google’s YouTube and Periscope. Arguably, it’s best to go big if making a social deal. Yahoo‘s (YHOO) move for smaller Tumblr wasn’t so good, but Facebook’s more audacious buy for Instagram made more sense. That Instagram deal was widely ridiculed at the time, but with time, it has looked better and better. A similar move for Twitter would initially provoke skepticism but could be a good long-term fit with a much larger owner.

TWTR Stock: Cons

Falling MAUs: In Q4, Twitter saw its U.S. Monthly Average Users figure actually decline. It’s been roughly flat internationally — MAUs were up just 3% year-over-year in Q1. While revenue continues to grow, thanks to video ads and better targeting, the overall platform has stagnated. Initiatives such as the NFL deal need to gain traction or the platform may continue to shrink in its home market.

While a flat large user base can be profitable, Twitter hasn’t yet achieved a level of omnipresence that would give it sticking power. If the user base continues to slowly shrink, it’s likely more people will tune out as their friends do so. Social networks generally grow, plateau, and then fade away. Only Facebook, through its gigantic size, has been able to avoid that fate so far. Twitter’s user figures aren’t yet a crisis, but it’s a real problem, and it needs to be fixed soon for TWTR stock to turn around.

Not Profitable: TWTR stock still doesn’t have a P/E ratio; the company continues to lose money. As mentioned above, the company has a strong financial position and does generate positive cash flow.

All that said, TWTR stock is risky from a valuation perspective. Analysts estimate that Twitter will become profitable this year, but they’ve been too optimistic before. It wouldn’t be shocking if the company remains unprofitable a good deal longer. The company’s strong financial resources give Twitter time to execute, but TWTR stock will remain depressed as long as the market judges management’s ability.

Stock Compensation Problems: TWTR stock has been falling. That’s no secret. However, it’s having negative effects that many people are not aware of. The Wall Street Journal reports that Twitter has been forced to take unusual measures to retain its talented staff.

Many startups rely on doling out stock options in lieu of large paychecks. This keeps the company’s cash run rate down while giving the employees meaningful upside if the firm hits it big. Twitter appeared to be just such a home run, with TWTR stock flying after its IPO. Since then, it’s been all downhill and the employees who’d been rich on paper have lost much of their gains.

To make up for that, Twitter has been doling out between $50,000 and $200,000 in cash to some employees to keep them from leaving for an additional six to 12 months. Furthermore, Twitter is giving out more stock options and units to employees to make up for the value lost as the stock falls. This additional issuance of stock and cash spend may significantly cap upside should Twitter turn around and shares start to move higher.

Twitter Stock: Verdict

TWTR stock represents a fine speculation at current levels. It’s trading closer to the bottom end of its wide 52-week range. It’s not hard to imagine scenarios that would pop TWTR stock much higher. A return to more convincingly positive MAU growth, successful efforts in online video, or a takeover bid are among the ways to win.

But make no mistake, TWTR stock is a speculation. This isn’t a buy and hold investment by any means. The company’s core offering is showing strain. The company’s strong cash position will ensure it has time to fight for a few years, but without profits or a dividend to fall back on, the stock could keep slumping for many quarters to come.

At the time of this writing Ian Bezek had no positions in any stocks mentioned. You can reach him on Twitter at @irbezek.

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Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2016/04/twitter-twtr-stock-pros-cons/.

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