Twitter Inc (TWTR) is crashing and burning — again — today. And if you think TWTR is just selling off in sympathy with the broader market, you’re not paying attention.
Twitter stock holders have been disappointed repeatedly in recent earnings reports, where both sales grow and user growth are falling sharply. Furthermore, TWTR is still unprofitable, and Twitter’s cost of revenue continues to rise faster than its sales.
Sure, the social media stock is deep in the throes of a CEO hunt, and the hope is that a new leader will turn things around for TWTR stock. But after losing 11% last week and trading down almost 60% from its 2015 highs, momentum and sentiment are decidedly against Twitter Inc right now.
That makes catching a falling knife next to impossible in Twitter.
And barring a substantive turnaround in earnings or user growth — two things that seem nigh impossible — TWTR stock might never recover from this 2015 bloodbath.
TWTR Stock in a Tailspin
I’ll admit that I truly enjoy using Twitter as a platform. It’s native to mobile, and it’s a great information filter in an age of too much clickbait. I also think it’s a great way to actually communicate with other investors, and I encourage anyone to hit me up anytime on @JeffReevesIP anytime.
But liking a product is vastly different than liking a stock. I mean, I also happen to like the occasional Big Mac, but I wouldn’t be caught dead buying McDonald’s (MCD) here.
Twitter simply lacks the scale that’s necessary to succeed as an advertising company — which, in case you don’t understand the company’s model, is what TWTR truly is underneath all those labels like “disruptor.”
“On a year-over-year basis, daily active users jumped by 17% to 968 million, while monthly active users were up 13% to 1.49 billion. For perspective, FB added more than 190 million net MAUs, which is more than half of Twitter’s total MAUs (304 million, excluding SMS users).”
If you’re a mega-brand looking to deploy millions of dollars on a campaign, you don’t divide that cash among 30 outlets … you just find the most effective channel, and let it ride. And for digital marketers, the two channels that matter are Facebook and its chief rival Google (GOOG, GOOGL) — both because of scale, but also because of great ad targeting capabilities.
No wonder the math isn’t working for Twitter as it races to catch up. The company is spending like crazy to try to acquire new users and develop effective relationships with marketers and advertisers … but so far, the money that’s going out remains more than the money coming in.
Click to Enlarge Consider recent Twitter earnings showing revenue up 61% year-over-year … but expenses up 68%. That’s not a recipe for sustainable growth, particularly when growth is slowing.
A CEO change can’t fix this mess. And yes, while the current bloodbath on Wall Street is partially to blame, it’s an oversimplification to say that Twitter is just a good stock caught in a bad market environment.
Aggressive swing traders may make a bundle here, of course, simply timing their bets right. For instance, on Monday’s historic selloff, dip-buyers right at the open could have snapped up TWTR stock for about $21 and sold it minutes later for $26 — a 23% gain in short order.
But aside from that kind of shrewd trading, Twitter is sure to leave even medium-term investors in tears.
The numbers just don’t work, the sentiment sucks and no CEO change can fix this mess.
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 firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.