When it comes to earnings, Twitter Inc (NYSE:TWTR) is fairly dicey. The latest report was no exception, as TWTR stock was crushed — evaporating most of the year’s gains.
Interestingly enough, the second-quarter results were not necessarily bad. Twitter beat the expectations on both the top and bottom lines.
So what was the problem? The user growth. For the past year, the Monthly Active Users (MAUs) rose by a mere 5%.
According to Bank of America analysts: “Twitter is an investment in increasing social and mobile Internet usage, and could become the leading platform for real time multi-media distribution. However, slower user and ARPU growth than peers suggests Twitter’s product strategies are not driving anticipated improvements. Also, video may prove to be a more competitive market for the company and growing EBITDA margins over product investment may cause company to fall behind competitors.”
The report also indicated an “underperform” rating on TWTR stock, with a $17 price range.
For the most part, I think this overall take is on target — although, it may still be underestimating the problems! So let’s take a deeper look at some of the risk factors with Twitter stock.
Three Risk Factors for TWTR Stock
User Malaise
On the earnings call, TWTR management gave several excuses — such as seasonality — for the problems with the user base. But these seem mostly like corporate spin.
Let’s face it, to put things into perspective, Facebook Inc (NASDAQ:FB) has been showing no signs of weakness, even though it has a massive scale and presumably is facing seasonality patterns. Yet during the latest quarter, the MAUs jumped by 17% to 2.01 billion.
Now for TWTR, there are several ominous consequences for the stagnant user base. First of all, the company essentially relies on one app. So if the deceleration continues, it will be difficult to grow the top line. This will also mean fewer resources to make the necessary investments in critical areas like video. In fact, there are already signs of this, as seen with Amazon.com, Inc.’s (NASDAQ:AMZN) outbidding for the rights to stream NFL games.
Something else: TWTR really does not provide the kind of scale and breadth of rivals like FB and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) for advertisers. Keep in mind that these operators have a wide assortment of dominant apps like Messenger, Instagram, Gmail, YouTube, WhatsApp and so on.
In light of this, it should be no surprise that FB and GOOG soak up more than three-quarters of the U.S. online ad market. The result is that there are mostly scraps left over for companies like Twitter.
Management
TWTR has a long history of management turmoil. And there are few signs of this ending. Recent departures include the vice president of finance and the vice president of live video engineering.
Then again, in light of the problems at Twitter, it is inevitable that employees may want to go elsewhere. Might as well focus on better opportunities, right?
Certainly.
But investors in Twitter stock should also be concerned about CEO Jack Dorsey, who is also spending his time at the helm of Square Inc (NYSE:SQ). While he is certainly a standout visionary in the tech world, TWTR still really needs a full-time leader.
Valuation
Even with the recent plunge in TWTR stock, the valuation is still far from cheap. Consider that the forward price-to-earnings multiple is about 43X. This is certainly a stretch as the company’s revenues are contracting and there are still no profits on a GAAP basis.
So yes, Wall Street analysts are also skeptical. For example, the consensus price target is $15.82, which implies 4% downside in Twitter stock.
Besides, there are other online operators that provide much more value, such as FB. After all, its multiple is at a reasonable 27X, which is at a steep discount to the growth rate.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
