Twitter Inc: China Can’t Save TWTR From Sinking

It looks and sounds great on the surface, but this doesn't address the bigger problem Jack Dorsey has on his plate

You have to give credit where it’s due — Twitter Inc (TWTR) isn’t going down without a fight. It’s doing almost anything and everything it can conceivably do to “make it work,” even when the future looks grim.

Twitter Inc: China Can't Save TWTR Stock From SinkingThe latest entry in the list of efforts Twitter CEO Jack Dorsey is leading: The company is proverbially and literally entering China, not to find users (Twitter is technically banned by the Chinese government), but to find advertisers.

While doing something new is always better than doing nothing for a company that’s headed towards the edge of a cliff, of all the things Twitter could do, this is arguably one of the more meaningless actions the company could take.

Kathy Chen is Twitter’s new managing director for China, and will be based there.

Her ultimate task?

Acquiring and assisting new advertising clients in that specific nation … clients that want to use the platform to attract customers outside of China. Lenovo Group Limited (ADR) (LNVGY) and Huawei Technologies are a couple of the example names that have been batted around, as have (ironically) state-run news outlets Xinhua and People’s Daily.

Twitter offered the following explanation for the new appointment:

“As a global platform, we are already engaged with advertisers, content providers, and influencers across Greater China to help them reach audiences around the world. Going forward, we will look to Kathy’s leadership to help us identify ways in which Twitter’s platform and technology assets can be utilized to [create] further value for enterprises, creators, influencers, partners, and developers in mainland China, Hong Kong, and Taiwan.”

If the name rings a bell, Chen formerly worked for Cisco Systems, Inc. (CSCO) and Microsoft Corporation (MSFT), doing similar work in the same market. She’s also worked with a software company with close ties to China’s Ministry of Public Security, and is clearly no stranger to the tight rope she’ll have to walk to remain in the state government’s good graces.

Superficially speaking, it’s a smart step to take for TWTR, and there’s no denying that Chen is qualified. As was noted though, stepping into this particularly complicated and unproven market isn’t the company’s biggest fish to fry.

TWTR Is Putting the Cart Before the Horse

Reality: Twitter doesn’t need new advertisers. It needs more users. Once it starts to grow the latter, the former will materialize, from all over the world.

Just as a reminder, Twitter didn’t muster any growth in its most recently reported quarter, rolling in at the same 320 million monthly users it reported for the quarter before that one. Taking its SMS “Fast Followers” out of the equation, the headcount fell from 307 million to 305 million in the fourth quarter of fiscal year 2015, though it has since returned to 307 million users.

These fluctuations are small but important, as SMS users are near worthless as revenue-bearing users. Whatever money is to be made by Twitter users is driven by web-based users.

Another decline in web-based users is a potential headwind that could come back to haunt TWTR.

Morgan Stanley said what needed to be said earlier this month:

“We see fewer users and less time per user holding back Twitter’s platform monetization – putting a limit on ad impression growth and holding back the pace at which advertisers increase their share of ad budgets toward the (shrinking) platform.”

Morgan Stanley went on to quantify that outlook, suggesting the microblogging outfit was only apt to add 2.6 million monthly users this year rather than previously projected 5.2 million … and that was factoring in the bump to be created by the agreement to stream 10 of this year’s NFL games.

It’s not tough to understand Morgan Stanley’s doubts, given its still-declining levels of user engagement. The company has seen seven consecutive quarters of weakening (but all-important) user engagement, and when the company reports again on April 26, many expect that streak to extend to eight quarters.

Bottom Line for TWTR

The point for current and would-be TWTR owners is that no potential advertiser anywhere in the world wants to make a major investment of time and money in a platform that has yet to prove it can grow its user base. Indeed, Twitter has yet to convince anyone it’s going to still be around (as we know it today) a few years from now.

That’s not to say Chen won’t create some semblance of success in China. She almost certainly will do so, as the company has more than 300 million users right now, and they can be targeted by advertisers.

What remains in question is their value to advertisers and whether they’ll stick around long enough to send the needed multiple marketing messages to.

Until Twitter can prove its viability, setting up shop in China is irrelevant, and in no way actually boosts the value of TWTR shares.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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