Twitter Inc (NYSE:TWTR) is a company that invokes strong reactions, both from bulls and bears as well as consumers who use the platform.
TWTR stock is down 9.8% in 2016, and down over 70% from its post-IPO peak in late 2013. However it’s up almost 50% from its 52-week low and many contend that the worst is over and Wall Street is way too pessimistic.
On the user side, Twitter Inc. can be seen by its proponents as an intelligent filter of information and a timely tool to accessing what’s going on in the world. Meanwhile, detractors point to the fact that the social media platform is rife with abuse and toxic hate speech that makes it a much bigger impediment to civil communication than anything else.
But as investors, we need to separate the hype and narrative from the facts. Twitter is not the first tech company to have tremendous fans and rabid skeptics alike, and there has to be a way to cut through the noise and get to the heart of the business.
So, based on the numbers, what is TWTR stock really worth?
TWTR Stock by the Numbers
Let’s talk about the tangibles first. The most important Twitter metrics right now are:
- 313 million monthly active users as of Q2 earnings.
- A low-single-digit growth rate in those worldwide users, with 3% year-over-year expansion in both Q1 and Q2.
- U.S. users, the most lucrative to advertisers, haven’t moved much of anywhere in two years. Domestic users peaked at 66 million in Q1 2015 and haven’t moved higher ever since.
- Related to all of these metrics, a report from a few months ago showed tremendous churn for TWTR stock, where more than a quarter of users quit the platform in short order.
There are plenty of pie-in-the-sky narratives about what’s next for Twitter – whether it can connect with Periscope long-term or whether it can ink high-profile deals with elite content providers like the NFL.
But that’s all speculation. What the current numbers show us is that TWTR stock isn’t growing its users, so deserves a growth premium based only on the hopes of better profits and margins.
On the plus side, revenue ticked up 20% year-over-year in Q2.
But in Q2, U.S. advertising revenue was up just 10% year-over-year, and down 9% sequentially from Q1 — so taken alongside stagnant domestic users, this is not encouraging for long-term growth.
Twitter is deeply unprofitable and has never turned a non-GAAP profit in its history.
So when you look at the numbers, it appears that Twitter is a no-growth and no-profit company that you’re paying for based on either its leadership, its technology, its users or simply the narrative.
Twitter Users and Technology
As I said at the onset, I’m not interested in narrative. And honesty, the idea of investing in Twitter’s leadership is rather laughable given its continued problems retaining top talent — as evidenced both by a rash of departures at the start of the year and a few more this spring.
But there is indeed value in technology, the platform and its users.
Just how much value, however, is the key question.
Facebook Inc (NASDAQ:FB) purchased WhatsApp for $21.8 billion in 2014, paying about $55 per user when it had over 600 million monthly users. Previously, in 2012 it paid $1 billion for Instagram and its 30 million users — about $33 per user. Both of those deals may have seen inflated price tags thanks to the stock-based nature of the deals vs. an all-cash offer, but they are useful benchmarks nevertheless.
More recently, LinkedIn Corp (NYSE:LNKD) was acquired by Microsoft Corporation (NASDAQ:MSFT) for $26.2 billion. With “cumulative” users of about 400 million, accounting for job seekers and employers as well as folks with a profile using the platform in a truly social sense, the deal was worth about $65 per user.
Thus, from a user perspective, Twitter could arguably be valued somewhere in the ballpark of $10 billion if it’s seen as an Instagram or $20 billion if it’s seen as more of a LinkedIn. With a current market capitalization of about $14.6 billion, it handily splits the difference.
Of course, Instagram was growing fast and LinkedIn was soundly profitable with a clear business case … while TWTR stock is neither.
The technology of Twitter is interesting, with the Periscope video app and various advertising tools among the most interesting parts. However, little that Twitter has to offer is incredibly unique. Especially as older networks like Facebook look to transition into private messaging akin to Snapchat, the existing 140 character platform isn’t exactly cutting edge and none of the software seems to be something worth paying a big premium for.
Twitter Has Unattractive User Base, Not Much Else
In my mind then, the only interesting thing Twitter has is a user base that is 300 million strong.
But as evidenced by the challenges in monetizing that audience via advertising, it’s not a particularly attractive user base. This is not a niche of valuable leads that are responsive to marketing, and it is not large enough to be sliced into effective marketing segments the way Facebook and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) leverage their platforms.
It’s also, sadly, a user base that is not incredibly polite and not policed well when it becomes abusive. That makes the environment toxic to new Twitter users as well as prospective advertisers and acquirers.
Will someone ultimately acquire Twitter? Perhaps. But it will be simply someone who is after the users, either to support a new and better platform or because they think they can reshape the company into something wholly different.
Both of those scenarios will push some of the existing base out, and both require a big leap of faith.
Neither seems to support much of a premium above current valuations — and frankly, I think you’d have to be insane to acquire this no-growth, no-profit company for north of $10 billion.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at [email protected] or follow him on Twitter via @JeffReevesIP.