Twitter (TWTR) is set to report its earnings after the market closes on Tuesday. And investors are wondering if the TWTR stock might just be a bit too heavy to fly.
For investors, there are only two “wings” that could carry TWTR higher. If it turns out those wings are missing in action, investors could find it difficult to get TWTR stock flying higher again.
What investors want to see are solid earnings and cost cutting measures.
TWTR Stock, Show Us the Earnings!
Twitter management likes to emphasize things such as active user growth and revenue growth. But while they were once good indicators for the company, all that investors should care about now is the bottom line.
Simply put, there is no more slack for TWTR stock. Investors want to know if they’re finally going to get something in return for their big investment. So far, they’ve gotten nothing but blood and tears. Analysts are expecting EPS of 4 cents — double the year-ago figure, but there are two reasons to believe TWTR is headed for a miss.
First, we have to look at the company’s expenses on Sales, general and administrative which include R&D. Those expenses have usually been higher than the total revenue, as seen in the chart below. Naturally, that trend makes any positive EPS, even 4 cents, doubtful.
Click to Enlarge
And the second, perhaps more notable, factor? According to reports from Nasdaq.com, Twitter’s director and co-founder Ev Williams sold roughly $7 million worth of stock in the beginning of the month.
Maybe that’s unrelated, but a director selling before the earnings releases just sends up all kinds of red flags. Common sense suggests that if TWTR was heading for a beat then maybe a director would be compelled to wait a little longer.
If Twitter fails to hit EPS targets (and the odds don’t seem very good) then TWTR stock is in for a lot of pain.
Deep Cost Cutting
The second thing investors want to see before taking on TWTR stock is cost cutting. With R&D costs so heavy and yet nothing to show for it, investors want deep cuts. And if Twitter doesn’t deliver … well, investors will just keep on worrying that TWTR is too heavy to fly.
Will we ever see the day when investors could regain the sense that they’re holding the next Facebook (FB) or Google (GOOGL)? If those reckless expenses aren’t cut down and cut down fast, I’m afraid that day won’t ever come.
The Bottom Line
TWTR stock is already hurting this year, down 4% in 2015. Most of that pain came after Q1 earnings in April, which sent Twitter down 25% in just two days. If Twitter posts another disappointing quarter, investors will simply have no reason to hold on to TWTR stock, possibly igniting a new round of selling and pushing TWTR stock down even further for the year-to-date.
After all this time and given so many losing quarters, investors shouldn’t be sidetracked by revenue and user growth. What Twitter needs is tangible earnings per share and better cash flow.
As of this writing, Lior Alkalay was short TWTR.
