Over the past month, shares of social media site Twitter Inc (NYSE:TWTR) have made their way nearly 30% higher on renewed investor optimism thanks to a better-than-expected first-quarter earnings report. If you bought TWTR stock at its IPO highs of $69 per share, you might be wondering if TWTR stock can keep going and bring you the returns you were hoping for — or at very least, allow you to break even.
The answer is probably not, so you might want to sell now and take your medicine because the little blue bird might be returning to nosedive position in the near future.
What About All the Users?
One of the biggest reasons for the Twitter stock rally was the company’s better-than-expected user numbers in its first-quarter results. Twitter’s monthly average user base grew to 328 million, a 3% increase. Daily active users were up 14%. On the surface, those figures look pretty promising — after all, social media companies are all about increasing users, right?
Right, to some extent. It’s important to remain relevant and take on new users, but it’s more important to make money off of those users, something at which Twitter appears to be failing. While TWTR’s monthly average users were up, its advertising revenue declined sharply. Ad prices have fallen off a cliff during the past two years, losing 33% in just the first quarter of 2017 alone.
Not only is Twitter failing to make money on its growing user base, but the growth that investors are cheering isn’t even all that great. To put things into perspective, Facebook Inc’s (NASDAQ:FB) monthly active users have reached 1.65 billion and are still growing. Not only that, but much of TWTR’s user growth came from outside the U.S., a troubling sign for the future.
Spending Spree
The worrying thing about seeing TWTR user numbers rise and revenue figures fall is the fact that the company’s core business, advertising, isn’t very profitable. What’s going to happen when Twitter can’t grow its users any more?
That’s going to be a big financial strain for TWTR, not only because it will mean less ad revenue, but also because it will mean the company will need to ramp up spending on promotions, marketing and adding new features to get user numbers up.
What About Live Sports?
Another thing TWTR stock bulls have been excited about recently is the live-streaming deal with the NFL. The two have signed a multi-year deal under which the microblogging site can stream “uniquely packaged official NFL video and other types of content.”
The deal isn’t bad news by any stretch of the imagination, but it’s also not as great as it’s been made out to be. First, and most importantly, Twitter still does not have the rights to stream live NFL games. Unsurprisingly, the NFL chose Amazon.com Inc. (NASDAQ:AMZN) for that honor.
This “uniquely packaged content” will allow brands to advertise on official NFL content through Twitter, which is certainly not a bad thing, but it’s unclear just what kind of content we are talking about and whether or not it will be interesting enough to drive people to the site.
A Sinking Ship
TWTR stock doesn’t have a lot going for it right now. Sure, the NFL deal will generate some buzz and yes, an increase in monthly active users is a good thing. But, neither of those two events are likely to make any real impact on Twitter’s bottom line because the company’s advertising business is floundering.
The social media site is unlikely to make it back to its IPO price anytime soon and investors who have been holding on to Twitter stock would be wise to cut their losses and move on.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
