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Twitter Forecast: Too Good to Be True

Twitter's outlook is far too optimistic to be taken seriously

After its third-quarter report, Twitter (TWTR) stock went into a tailspin. But as owners of Twitter stock know quite well, things can change instantly.

TWTR twitter stock price twitterCase in point: Twitter hosted its Analyst Day, Wednesday, featuring a presentation that sent Twitter stock surging 7.5% … only to have TWTR fall 6% the next day.

Still, Wednesday’s jump is the biggest upward movement we’ve seen in a while. So, why all the excitement?

There’s little doubt that TWTR CEO Dick Costolo pulled off a bravura performance with his presentation. His message was crisp and clear, especially when compared to what he said during his Q3 conference call.

First of all, he announced some important new features for the TWTR service, including the ability to share videos and allow improved private messaging. There is also something called “while you were away,” which provides relevant content you may have missed. All these features should help boost engagement for TWTR.

The company is also going to pursue a multi-app strategy. Twitter has already gotten traction with Vine, which is a short-form video sharing service. But as seen with Facebook (FB), which operates apps like Instagram and WhatsApp, a multi-app approach does make a lot of sense. In the mobile world, users want focused solutions.

Forecast Bodes Well for Twitter Stock … If You Believe It

While all these moves are encouraging, investors were likely most enthused about the user metrics. TWTR noted that its website and apps reach more than 500 million users per month. While many users actually don’t log in, the company can still flash ads. Google (GOOG), the king of advertising, actually takes a similar approach — after all, most users don’t log in to Google accounts before searching the Internet.

More importantly, TWTR believes it can aggressively monetize this traffic. The company forecasts revenues of $11 billion within five to eight years. This would mean that the user base (including visitors that aren’t logged in visitors) would reach 2 billion.

All these numbers look like decent improvements … but we’re still seeing long-range thinking that doesn’t address today’s problems. Besides, some of the analysis is far from airtight. The fact is that, compared to other social media platforms, TWTR remains tough for many users — how many people understand retweets or hashtags?

Because of these challenges, there is likely a cap on the monetization potential for TWTR.

Besides, the company’s forecast is downright comical. How can a social media company have a credible forecast for 2020? No doubt, the industry is constantly changing, with new innovations emerging. Oh, and there is always the chance that users may simply get tired of TWTR and move onto something else. Just ask Zynga (ZNGA), Groupon (GRPN) and MySpace what that’s like.

In other words, it is probably best to discount TWTR’s long-term revenue estimate.

Twitter stock is already down 37% for the year-to-date, and investors should still be cautious. User growth remains dicey, and it is far from clear if TWTR will ultimately get to substantial revenue levels. In the meantime, there has also been lots of drama in the executive suite, with notable executives bolting.

So, after their initial excitement over Twitter’s forecast on Wednesday, it looks like investors woke up with clearer heads the next morning. And until the company can get its act together, investors would be wise to avoid Twitter stock and be skeptical of it’s long-term forecasts.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll 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.

Article printed from InvestorPlace Media,

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