Twitter Inc. (TWTR) has had a rough go of things in 2014. On the year, TWTR stock is down about 35% — and while there were glimmers of hope for Twitter a few weeks ago as shares fought back, the social media company has fallen off a cliff with a 25% loss since mid-October.
The most recent cause for weakness in Twitter stock is, of course, another disappointing earnings report. Unlike its profitable peers in the space like LinkedIn Corp. (LNKD) and Facebook Inc. (FB), Twitter continues to struggle just to break even.
And in this volatile stock market, unprofitable tech companies like Twitter Inc. that bank on the hopes and dreams of investors don’t have much room for missteps.
Here’s why Twitter will continue to feel the pain for the rest of the year, and why investors should expect underperformance from TWTR stock across 2015 as well:
Twitter Earnings Stink
After Twitter earnings hit, the stock quickly moved downwards on investor pessimism — and with good reason. TWTR reported lower-than-expected user growth in its earnings, topping out at 284 million monthly users on the quarter. That was up an anemic 4.8% from the previous quarter, with Q3 user growth at Twitter slower even than the 6.3% pace of growth in Q2.
Twitter Inc. has suffered fears for some time that the platform is flatlining, and this earnings report was yet another confirmation of that trend.
Adding insult to injury was an admission from CEO Dick Costolo that despite its best efforts, Twitter failed to connect with global audiences around the World Cup as it had hoped. For a company that makes overtures about being a valuable “second screen” for consumers to engage with as they watch TV, that’s a huge disappointment.
Digging deeper, revenue forecasts of $440 million to $450 million were merely in line with expectations. While it’s fine to reinforce the status quo when investors are pleased, the fact that Twitter had already plunged MORE THAN 20% year-to-date before earnings is a clear sign that Wall Street needs a change of narrative to believe in TWTR stock again.
Throw in a company that is profitable only on paper — posting a GAAP loss for Q3 and squeaking out less than $7 million in net in profits even when you use more lenient accounting methods — and there’s not a lot to like about Twitter right now.
TWTR Stock Still Overvalued
You’d think that a pounding like this may spark hopes of bargain hunting. But sadly, even after these recent declines Twitter Inc. sports a forward P/E of more than 120!
That kind of price-to-earnings ratio is fine for a high-growth company that has a strong tailwind from investor sentiment. but given the sustained declines in 2014, the narrative on TWTR stock is decidedly negative and there’s not a lot of hope to back up that massive earnings multiple.
There’s a general impatience on Wall Street with unprofitable tech stocks, including not just Twitter but also companies like Amazon.com Inc. (AMZN). AMZN stock has lost 25% so far in 2014 and shows no signs of turning around anytime soon.
The bottom line, increasingly, is the bottom line. And sadly for TWTR stock holders, Twitter is break-even at best.
And while its revenue did double year-over-year, it’s important to acknowledge the less impressive 15% revenue increase quarter-over-quarter. Aside from coming up with a new “mousetrap” to make money off of users, Twitter seems to be locked into this rather disappointing business model.
I personally like Twitter a lot as an information filter, and as a way to talk to other investors. And if you use the platform yourself, I encourage you to Tweet me anytime via @JeffReevesIP.
But TWTR stock is an investment, not a non-profit that exists for our amusement. And as investors we should demand continued growth and significant profits in future.
Twitter’s prospects of both are rather bleak … so I’d sell this dog now, and expect continued trouble in 2015 based on the recent earnings trouble.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at [email protected] or follow him on Twitter via @JeffReevesIP.