Twitter Inc (NYSE:TWTR) stock got a lift Monday after the market learned that a well-known activist investor took a stake in the trouble social media platform, but Twitter stock needs a lot more than a boardroom shake-up.
Jana Partners now has roughly 2.9 million shares of Twitter stock and 100,000 call options to boot. The hedge fund led by Barry Rosenstein is a major player when it comes to using its influence to make major changes at the companies in which it invests. What Jana tries to do with TWTR is anyone’s guess, but it’s clear CEO Jack Dorsey has a new headache.
After all, Twitter already tried to sell itself but found no takers. Jana could renew the pressure to sell, but that won’t change the fact that there’s no market at the current price.
How is Jana supposed to get anything out of a stake that needs to depreciate in order to move?
More likely, Dorset is on the hot seat. Jana will want someone else to make Twitter more palatable as an acquisition target. That will undoubtedly include more cost cuts, but Jana is going to need more than that.
Whoever ends up running things at Twitter needs to get it growing again, and at a fast pace. Try as they might, that just doesn’t appear to be possible with Twitter stock.
Twitter Stock Is Still Dead Money
The industry in which TWTR competes is ruthless once something else becomes the hot new thing. Twitter’s user base topped out even before Snapchat and Instagram started grabbing all the glory. And it can’t even adequately monetize the interest it does manage to command.
That said, Twitter is still enormously important. It’s taken a central place in the culture and was instrumental in the presidential campaigns. But as a hot-growth momentum play, Twitter stock is a has-been.
The issue is that it’s too small and not scaling fast enough. A user base north of 300 million might sound impressive, but not when you compare it to the competition.
Facebook Inc (NASDAQ:FB) itself has 1.71 billion users. Facebook’s Instagram counts more than a half-billion users. Most worrisome of all, Snapchat has supplanted Twitter as the social network worth betting on. Indeed, it’s only four years old and already has more daily active users than TWTR.
This is what advertisers want to see, especially when they direct so much of their spend to the duopoly of FB and Alphabet Inc‘s (NASDAQ:GOOG, NASDAQ:GOOGL) Google. They want to have more alternatives in digital ads. If Twitter can’t deliver the eyeballs, someone else will.
That’s why cost cuts will fall short in making Twitter stock attractive to a buyer. The issue is growth. What’s the right price to pay for a no-growth, net-loss company that’s being crushed by the mainstays of its industry and lapped by the upstarts? Cost cuts are management by arithmetic. What Twitter needs is a new strategy.
And even then it may be too late. It’s quite possible that TWTR has as many users as it’s ever going to have. The market is saturated. It’s simply reached its popularity xenith. That’s a heck of a risk to discount for.
TWTR stock’s only catalyst was a potential sale. An activist investor might give it a spark, but with no credible exit plan, it won’t last long.
It looks like the best-case scenario for Twitter stock going forward is sideways trading. Jana can’t work miracles. It took a relatively small stake and call options for a reason.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
