Twitter Inc (TWTR) Stock Still Needs a Hero … And Video Isn’t It

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TWTR stock - Twitter Inc (TWTR) Stock Still Needs a Hero … And Video Isn’t It

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The consistent enthusiasm toward Twitter Inc (NYSE:TWTR) stock never ceases to amaze. TWTR stock somehow managed to reach a nine-month high last month ahead of Q2 earnings. Unsurprisingly, the stock then fell 14%, and kept falling, creating a new three-month low in the process.

Twitter Inc (TWTR) Stock Still Needs a Hero ... And Video Isn't It

No matter what Twitter actually does – and of late, it’s been very little – there seems to be a diehard cadre of investors looking to buy Twitter stock.

For years, the company was considered an acquisition target. Indeed, TWTR stock hit $25 last October on takeover optimism. In a matter of weeks,  Walt Disney Co (NYSE:DIS), Salesforce.com, Inc. (NYSE:CRM), Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL) all were reportedly interested. But, in the end, all passed — and Twitter stock tanked.

But by July, TWTR stock had recaptured about half of the losses seen after the buyout scenario fizzled. And that optimism came despite basically zero user growth, declining revenue, and profits that came only on a non-GAAP basis and only by ignoring the steady dilution of shareholders.

After the disappointing Q2 earnings report, I wouldn’t be surprised if bulls once again try to push the stock higher. And the angle they’ll likely take is to talk up the company’s possibilities in video. Twitter management itself has emphasized video to try and create some sort of growth given the struggles in the legacy business.

I’m not buying it — both literally and figuratively. The company’s ambitions in video make some sense at the moment. But video isn’t going to save Twitter stock.

Twitter’s Media Ambitions

Twitter’s foray into video first gained wider attention when the company signed a $10 million deal with the NFL last year to broadcast select Thursday Night Football games. But of late, Twitter clearly has put an increasing emphasis on live video.

In Q2, Twitter streamed over 1,200 hours of live content — more than double the figure from just two quarters prior. While Twitter lost the NFL deal to Amazon.com, Inc. (NASDAQ:AMZN), it has inked deals with smaller leagues, including the WNBA, Major League Lacrosse and the Canadian Football League. It’s also adding regularly scheduled sports programming, and news through a partnership with Bloomberg.

This isn’t a minor initiative. As Business Insider pointed out last week, the video strategy is being pushed hard by COO Anthony Noto. Noto is, as BI called him, the “de facto day-to-day leader” of the company, with CEO Jack Dorsey doing double-time between Twitter and Square Inc (NYSE:SQ). And Noto seems to want to turn Twitter from a social media platform into a media company.

Video Won’t Save Twitter Stock

From a strategic standpoint, the pivot is an intriguing one, I’ll admit. And I don’t know that Noto is necessarily wrong in making the move.

But from a fundamental standpoint, the increasing focus on video should be bad news for Twitter stock, particularly in the near-term. For one, the move to video at its heart is an admission that the Twitter platform is plateauing — for good.

TWTR management has talked up double-digit increases in daily active users (DAUs) over the past four quarters, though it stubbornly refuses to admit what the actual number is. But it’s hard not to believe that some of that growth is coming from the free attention brought to the site by President Donald Trump, which raises questions about how sustainable those growth rates are.

Secondly, video adoption has substantially compressed Twitter’s pricing. Cost per engagement fell 53% in Q2, after declining 64% the year before. That’s an 83% drop in two years. Twitter’s operating margins have basically been flat despite aggressive cost-cutting measures, which aren’t sustainable either. As it stands now, Twitter, is not profitable, accounting for the value of options issued to employees. Trying to build those profits on the back of declining ad rates requires engagement to skyrocket.

And I’m skeptical that’s happening. Twitter’s programming is available elsewhere. 24/7 sports network Stadium is basically ESPN-lite. Bloomberg content already is available elsewhere. There’s an argument that the combination of video and Twitter in the same screen is useful — and that might be true. But that isn’t going to drive some huge spike in viewership of financial news, or triple ratings for the WNBA. And it certainly doesn’t justify the $9 billion valuation of Twitter stock.

TWTR Stock Is Still Too Expensive

Bear in mind that, even backing out ~$2.6 billion in net cash, Twitter stock is valued at about $9 billion. AMC Networks Inc (NASDAQ:AMCX) is valued at about $7 billion, including its debt.

AMC has generated $880 million in adjusted operating income over the past twelve months. Twitter’s figure will likely be around zero. AMC has The Walking Dead, far and away the most profitable show on television right now. Twitter has lacrosse, and cricket, and sports and news highlights.

Yet TWTR stock has a higher valuation than AMCX stock. And if that valuation is based on video, it is far, far too high.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/twitter-inc-twtr-stock-needs-hero/.

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