I’ve never been a fan of Twitter (TWTR) stock.
Here’s the issue surrounding this over-hyped security: The product doesn’t solve a problem.
It has certainly revolutionized Internet communication, in that it allowed for public, worldwide conversations in real time. Nowadays, social media campaigns all involve TWTR.
But the world doesn’t need Twitter. Twitter doesn’t solve any problem. Twitter acts as an adjunct and nothing more. If a product doesn’t solve a problem, even a niche problem, it is going to have a difficult time becoming a self-sustaining business. As The Associated Press reported, “While many people are familiar with Twitter, the company has not been able to convince people that they need it.”
That’s the overview. Now I want to get into five specific reasons that Twitter stock looks sunk for good.
Where’s The Growth?
TWTR reported 316 million average monthly active users in the most recent quarter, which was up 15% year-over-year but only up 8 million from the previous quarter. When you back out SMS-only users, the gross number falls to 304 million (up 12% YOY) but that’s only a 2 million increase over the previous quarter.
This is not a blockbuster growth business because it is not a blockbuster growth platform. It reinforces my primary thesis: TWTR does not solve a problem, so people aren’t adopting it.
Think about Starbucks (SBUX). Howard Schultz had a vision to create a place where people could meet between work and home. That vision is continually expanding.
What is the vision for Twitter, and therefore, for Twitter stock? Here we have this nifty new communication platform, and yet there’s no vision for how to turn it into something other than just being a nifty new communication platform. Maybe there is no other way to leverage it.
TWTR must feel the same way, since former CEO Dick Costolo departed in June. A CEO doesn’t depart a social media company that is just two years into it being a public vehicle if there is a vision for the company.
This is a subset of the vision problem. Interim CEO Jack Dorsey highlighted this issue himself during a discussion of the last quarter’s earnings. He said:
“People all over the world know of the power of Twitter, but it’s not clear why they should harness it themselves. An answer to ‘why Twitter’ must be articulated clearly and felt everywhere throughout the service.”
That’s exactly right. The problem is that such messaging is not going to matter to Twitter stock because — again going back to the original premise — Twitter doesn’t solve a problem.
The messaging must be crystal-clear for users: “Here’s how Twitter can help you do X.” “If you are a small-business owner, Twitter can do Y for you.” “Twitter will make specific difference Z in your life.”
Right now, nobody knows why they should use TWTR.
It’s Losing Money
Twitter stock is struggling because, despite all these users, the company is losing money. Every quarter, there are losses. I see nearly $600 million in losses over the trailing 12 months, and the company has negative free cash flow. That’s not a huge problem, though, because it has about $2 billion.
But when does the darn thing start making money?
Insiders Aren’t Buying
This may be the most telling element of the whole thesis. The stock roared from its $26 IPO price to $70. You’d think that if the company’s prospects were so awesome, insiders would be buying hand over fist now that Twitter stock is back at its IPO price. That hasn’t happened.
Twitter stock isn’t going to zero. On the contrary, some company will likely buy out TWTR. I have no idea what the price will be, but I suspect any suitors are waiting for the stock to fall even further. Somebody out there has both the capital and a vision for TWTR.
I just don’t want to hold the stock while I wait for this white knight to show up.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he owns SBUX. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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