Twitter (TWTR) was the center of attention last week and not for the right reasons. TWTR stock tanked Tuesday afternoon after Twitter earnings were leaked early, hitting the market two hours or so before the closing bell.
The pain continued for Twitter throughout the week, with TWTR stock losing 25% in about five days. Twitter revenue missed its target, the company lowered its guidance and investors that were worried about froth in tech had now found a new poster child in the social media giant.
No matter how much extra time investors had, the facts just simply don’t point to Twitter being a good investment right now — even after a deep selloff.
Some are indeed saying that TWTR stock remains a bargain buy, because of either a potential buyout buy a big tech company like Google (GOOG, GOOGL) or because of potential gains from projects that include its much-hyped Periscope video broadcasting tool.
As a matter of fact, I had a nice little sparring match, which you can watch in the accompanying video below, with one of the Twitter bulls on CNBC last week. And these were two of his main points — which, by the way, have almost zero chance of impacting the ugly performance metrics that we just saw in the first-quarter TWTR earnings that sparked these declines.
Look, we’ve been down this road many times before with tech companies. It starts with investors salivating over the potential buyout premiums and talking up new technologies, overlooking a lack of profits or potential competitors … only until they can’t deny the harsh reality anymore and are forced to capitulate.
Now, I’m not saying Twitter will go to zero tomorrow, and for the record, I am a big fan of the platform from a consumer perspective — tweet me @JeffReevesIP anytime!
However, as I say in the CNBC clip, it’s crucial to separate your feelings as a consumer and your hopes of magical long-term potential from the harsh realities of the here and now. The reality is that Twitter is unprofitable, is seeing user growth slow and can’t hit its revenue targets.
TWTR Stock is Riding Narrative, Not Reality
In case you missed the Twitter earnings details, let me lay them out for you:
- TWTR stock posted $436 million in Q1 revenue, missing internal targets of $440 million to $450 million and far short of Wall Street expectations that were closer to $460 million.
- Twitter reported yet another GAAP quarterly loss, meaning TWTR has never been profitable under “generally accepted accounting principles.”
- Monthly TWTR users hit 302 million, up less than 5% quarter over quarter and just 18% year over year to continue the narrative of deceleration in its user base.
This is your growth stock to end all growth stocks? You can find better performance in a burrito company like Chipotle (CMG) or a clothing company like Under Armor (UA) than this “disruptive” social media stock.
The narrative is sexy, sure, and it’s tempting to think that Twitter is the next Facebook (FB). However, the reality is that investors are buying hopes and hype more than actual performance metrics. That makes TWTR stock an aggressive “buy” at best and an all-out gamble that TWTR will just magically figure things out at worst.
When you throw in a forward price-to-sales ratio of more than seven based on 2016 forecasts and a forward price-to-earnings ratio of 50… well, I don’t see any reason to be bargain hunting here.
Twitter stock will undoubtedly bounce back and stay volatile. So, maybe there is money to be made for sophisticated traders who can watch the charts or ride sentiment. Still, if you’re long TWTR stock because you expect it to redefine the internet? Well, maybe it’s time to redefine your expectations.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at [email protected] or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.