Twitter Inc (NYSE:TWTR) has staged a nice rally since early June, with a gain of about 27%. A big catalyst for TWTR stock was Microsoft Corporation’s (NASDAQ:MSFT) $26 billion acquisition for LinkedIn Corp (NYSE:LNKD), which spurred quite a bit of buyout speculation in the tech sector.
Amid the buyout buzz, investors need to pause for a moment, and ask themselves if TWTR stock still a good play here.
Several Wall Street analysts are showing some bearishness.
Today, Bob Peck — who is with SunTrust Robinson Humphrey — downgraded TWTR stock to “neutral,” with a price target at $18. In his report, he noted ominous issues like underwhelming product innovation, fierce competitive forces, meager user growth/engagement and a tougher market for advertising.
Monness Crespi Hardt’s James Cakmak is also worried. He also slapped a “neutral” rating on TWTR stock, and had this scary thing to say to investors: “We believe, barring any changes, Twitter was, is, and will continue as a niche product in terms of engagement and content contribution.”
No doubt, the lifeblood of any dot-com is user growth. And in the case of TWTR, the awful reality is that the company was only able to muster a 3% increase to 310 million on a year-over-year basis.
Meanwhile, the competition continues to get more intense. Facebook Inc’s (NASDAQ:FB) Instagram recently hit the milestone of 500 million active users, up 2X over the last two years. The photo-sharing app — which was one of the pioneers of the mobile-first strategy — also has 300 million daily active users, which is a strong indication of heavy engagement.
Then there is Snapchat, which recently logged more daily active users than TWTR. Consider that TWTR is actually more than five years older!
Given all this, it should be no surprise that TWTR has been having a tough time snagging ad dollars. Keep in mind that — during the last year — the company’s revenues increased by a mere 36%. By comparison, FB posted a 52% increase.
TWTR Stock Issues
Yet there could be even more pressure on TWTR stock. After all, with signs of a slowing global economy, there could ultimately be tightening of budgets for advertising. And it seems reasonable that lesser players like TWTR could be the first to be cut.
TWTR CEO Jack Dorsey has attempted to innovate, but nothing seems to stick, as seen with offerings like Moments as well as efforts to simplifying the user experience.
Then again, developing popular apps can often seem to be like winning the lotto … who would have thought that Nintendo’s Pokémon Go app would go viral? In less than two weeks, it has almost as many users as TWTR (in terms of the Android platform in the U.S.).
Yet Dorsey is also running another struggling company, Square Inc (NYSE:SQ). It seems reasonable that he does not have enough bandwidth to be laser-focused on making TWTR an awesome product.
Bottom Line on Twitter Stock
LNKD chairman Reid Hoffman recently said a key reason for selling out was that it was getting too tough to compete against the mega operators like FB and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).
The same can definitely apply to TWTR. But this does not necessarily mean a deal will happen any time soon. There are many examples where tech companies have waited too long, such as with BlackBerry Ltd (NASDAQ:BBRY) and Nokia Corp (ADR) (NYSE:NOK).
Besides, TWTR stock is not a bargain. The shares trade at roughly 26 times forward earnings, which is the same as FB’s. So, why not just buy FB — which has consistently been profitable, is growing revenues at a quicker pace and is showing no signs of user momentum?
I’m really not sure.
What’s more, Twitter stock has often dived on its earnings report, often because of lagging user numbers. And the next report comes in July. So, for now, it’s probably best to hold back.
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.
