Twitter Inc. (NYSE:TWTR) saw a short-lived pop recently on rumors of a private equity buyout. But in just a matter of days, TWTR stock has given back all of those gains and has once again plumbed new lows.
Twitter stock has been in decline since the beginning of 2014, when it peaked at around $70 a share. Now, at around $17 for each share of TWTR stock, those investors who bought at the peak are sitting on losses of over 75%.
Every time the social media stock has seen a glimmer of hope along that steady path lower, the “buy the dip” bulls come out of the woodwork. They claim Twitter is a steal here before it rebounds, and that there is a ton of inherent value in the company that Wall Street just doesn’t understand.
But the reality is that Twitter stock has very little to offer investors. It’s a dying tech company that will eventually disappear.
Twitter Has No Profits and No User Growth
Twitter earnings will hit in about a week, and investors can expect yet another loss. Sure, Twitter likes to do some clever accounting tricks to claim a non-GAAP profit — and a meager one at that, coming in at just $67 million in adjusted net income for fiscal Q3. But under generally accepted accounting practices, Twitter is losing money and hasn’t ever turned a real profit.
You might think that this in and of itself isn’t a problem, since plenty of high-growth companies invest heavily in themselves in the interest of expansion. However, Twitter’s growth remains seriously challenged.
Consider that user growth has slowed to the low double digits year-over-year and is effectively flat quarter-over-quarter. Without more people on its platform, Twitter is going to be seriously challenged in regards to future growth.
And while it’s fine to plateau once a reasonable scale is reached, as Facebook Inc. (NASDAQ:FB) has, Twitter is hardly at that level yet. Consider that in its recent Q4 earnings report, Facebook revealed that it only added 14% more users year-over-year … but the raw figure was almost 200 million users. That’s two thirds of Twitter’s entire user base!
Twitter simply doesn’t have the scale to slow down yet.
Admittedly, the top line is rising nicely, with good revenue growth for TWTR stock lately. But there remains the acute problem of rising costs along with that. In Q3, revenue was up 57.5% year-over-year … but costs of revenue were up 61.2%. It’s hard to ever get ahead with math like that.
The bottom line is, after all, the bottom line. And while there are rare exceptions where companies like Amazon.com, Inc. (NASDAQ:AMZN) get away with operating at a loss for a long time, Twitter simply doesn’t have the other metrics necessary to allow investors to overlook persistent losses with no hopes of change in the near term.
TWTR Stock Has a Sentiment Problem
Of course, the bigger problem is that TWTR stock simply doesn’t have the trust of Wall Street. The sentiment around this company is just plain abysmal.
And I’m not just talking about the pain suffered by investors thanks to share price declines. There are plenty of other ugly headline that prove Twitter is a questionable operation.
Consider the inept search for a new CEO in 2015, which took nearly four months and included flip-flopping on whether it would allow Jack Dorsey to take over as part-time leader given his other duties at mobile payments company Square Inc (NYSE:SQ) during that company’s run-up to an IPO.
It’s also worth remembering that Jack Dorsey returning wasn’t exactly greeted like Steve Jobs returning to Apple Inc. (NASDAQ:AAPL). In the book Hatching Twitter, Nick Bilton portrays Dorsey as a petty manager who took credit for other people’s hard work but took criticism poorly and presided over a Twitter plagued by persistent “fail whale” glitches even as he spent plenty of time outside the office partying and taking art classes.
Hardly a confidence boost.
More recently, we have seen the mass exodus from the leadership team — leaving many questions in their wake. Sure, there is clearly need for a shakeup … but with the pace of changes at the highest levels of the company over the last two years, the departures seem more like acts of desperation and pessimism rather than an honest reassessment of business needs.
In a week or so, we shall see what Q4 earnings look like and what the end of 2015 brought for Twitter. But going forward, it’s crucial for Twitter to figure out some kind of strategic message for Wall Street that resonates.
Otherwise, with poor metrics and poor sentiment, there is nowhere for this social media stock to go but down.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
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