Twitter (TWTR) stock has had a rough year, down 30% in the last six months alone.
This is a company that was once a Wall Street darling, a favorite among retail investors, institutional investors, and speculators alike. However, the tide has obviously turned, and by the looks of things, the future doesn’t seem much brighter.
From Oct. 15 to Oct. 30, the number of TWTR shares held short rose by 2.58 million. This means that 11.3% of Twitter’s float is short, compared to just 1.5% for Facebook (FB). Yet the Twitter stock price is 64% lower than its post-IPO high.
One might think that investors would be betting on a stock recovery … but instead, investors are placing bets that Twitter stock will keep going lower.
3 Reasons Wall Street Is Still Bearish
With that said, there are several reasons why Wall Street has suddenly become even more bearish on Twitter stock.
For one, institutions are selling TWTR. While Twitter’s institutional ownership sits at 44.6%, that percentage has declined by 8.3% over the last six months as institutional investors exit Twitter stock. This is clearly a concern.
Second, there is a lot of instability at the top. Jack Dorsey recently became the permanent CEO at Twitter following Dick Costolo’s resignation. Dorsey acted as the interim CEO while Twitter saught new leadership, but that search came up empty-handed.
While Dorsey has implemented several changes to streamline Twitter’s operations and make the platform more consumer friendly, there are still concerns regarding his commitment to the company. Dorsey remains the CEO of payments company Square, which is prepping an IPO.
Many fear that Dorsey can’t juggle both projects while also sitting on the Board of large companies like Disney (DIS) and reportedly chasing other aspirations, like politics. Investors are happy to have Dorsey back, but they remain concerned that Twitter is only getting a piece of Dorsey’s attention.
Now we come to the final, and most serious problem: user growth. Twitter has had a tough time appealing to the everyday consumer, with growth becoming non-existent in recent quarters. During TWTR’s latest quarter, its monthly active users grew just 1% quarter-over-quarter, hitting 320 million.
While management continues to pump the prospects of MAU and logged-out user growth, there are several research firms like Detwiler that think Twitter’s user base is reaching a peak. Twitter gets 65% of its revenue from the U.S., but its U.S. user base has grown by just two million MAUs over the past 12 months, so growth concerns are most certainly legitimate.
Twitter Must Prove Itself
Twitter no longer gets the benefit of doubt from investors. From now on, it must prove itself if it wants any respect from the market. And while Twitter stock has fallen in a violent manner, it still trades at nine times trailing 12-month sales and has an operating margin of -24% for the same period.
As a result, there are questions regarding whether or not Twitter can maintain an explosive growth rate and also improve margins to become profitable the way Facebook has. Collectively, these are serious questions that have investors doubting Twitter stock, and short interest is rising.
Unless Dorsey’s latest moves have a profound effect on the business, there’s a good chance that Twitter stock will keep falling, making plenty of money for TWTR shorts.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.