Facebook Inc’s (FB) Mark Zuckerberg once said this about Twitter Inc (TWTR): the company is “such a mess — it’s as if they drove a clown car into a gold mine and fell in.” He was spot-on. More importantly, the mess for Twitter stock seems to be getting worse.
Just look at the stock chart (and keep in mind that its IPO price was $26): Over the last 12 months, Twitter stock is off by a grueling 61% — down to $14. Today, its market cap is a mere $9.8 billion.
On the other hand, FB has logged a 45% gain during the last year and boosted its market cap to about $332 billion. Heck, even LinkedIn Corp‘s (LNKD) market cap is notably larger at about $17 billion.
As should be no surprise, Wall Street analysts are losing their patience … and fast. Just look at MoffettNathanson, which recently downgraded Twitter stock from neutral to a sell. Oh, and the commentary came via Twitter:
“While initiatives like the monetization of logged-out users and courting direct response advertisers through ROI and measurement partnerships like the DoubleClick integration could lead to some stabilization and possibly upside in late ’16/ early ’17, they probably do too little, too late. The small likelihood of a meaningful payoff doesn’t justify owning the stock here.”
There was also this zinger regarding TWTR: “hope is not a strategy.”
The company has already been showing ominous distressed signals with its earnings reports, so this kind of brutal commentary should be expected. In fact, during the latest period, although TWTR posted a 36% increase in revenues to $594.5 million, this was well below the 74% increase for the same period a year ago.
The losses also remain a permanent feature of TWTR. In the last quarter, the net loss came to $79.7 million. To put this in perspective, for the prior quarter, FB grew its revenues by 52% and the profit came to a juicy $1.5 billion.
Overall, this should be downright embarrassing for TWTR.
Twitter Stock: A User Problem
Of course, the main issue for TWTR is its user growth — or lack thereof. In the first quarter, TWTR added a mere 5 million new users, for a total of 310 million. This was a 1.6% increase from the prior quarter.
As I’ve noted various times, TWTR remains complex, with its retweets and hashtags. If anything, it is far from clear what the focus is for the product. According to Zillow Group Inc (Z) CEO Spencer Rascoff, in a CNBC interview: “The challenge before Twitter is they need to explain to my mom what Twitter is and why she should care.”
It also does not help that TWTR CEO Jack Dorsey is also running another struggling public company, Square Inc (SQ). Just imagine if Zuckerberg decided to spend half his time with another tech operator … true, it’s hard to imagine.
Even with the precipitous drop in TWTR stock, the valuation is not cheap. The forward price-to-earnings multiple is roughly 18X. Although, this is probably understated because of the large amounts of stock completion (I recently wrote a post about this).
Yet, the most serious problem for TWTR stock is how far behind the company is from its competitors. After all, the moves into video are still in the early stages.
But there is no offering for messaging, which is a strategic market, as well as artificial intelligence and virtual reality. Then again, TWTR really does not have the resources to make the investments — both with research and development and acquisitions — to make a serious play for these important categories.
In other words, for investors looking at a way to play the megatrends of technology, there is an attractive option — Facebook.
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.
