Why Twitter Inc (TWTR) Stock Has 20% Downside

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TWTR stock - Why Twitter Inc (TWTR) Stock Has 20% Downside

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Twitter Inc (NYSE:TWTR) has suddenly caught fire — since hitting a low in mid-April, TWTR stock has gained about 35% or so. But it’s important to keep in mind that Twitter faces a laundry list of challenges, and this move more likely than not is a temporary thing.

Twitter, Inc. (TWTR) Stock Is Still In the Danger Zone

Granted, Twitter’s latest earnings report was encouraging, at least on the grounds that it scored a first-quarter beat. But the bar was set low. Revenues came in at $548 million, and adjusted earnings came to 11 cents. The Street was looking for a mere $511.9 million on the top line and a profit of just a penny.

What had TWTR stock holders excited was the user base. Twitter added 9 million monthly active users, a 6% year-over-year rise to 328 million users. Growth was just 4% in the prior quarter.

Yes, some of this represents progress, but Twitter is still struggling. Compare the MAU growth to the most recent Facebook Inc (NASDAQ:FB) report, in which MAUs jumped an impressive 17% … to 1.94 billion! Why can’t Twitter, with its much smaller user base, ramp up by single digits?

Worse, Twitter’s top line was down 8%, marking Twitter’s first year-over-year decline on that front since joining the public markets. That came on an 11% drop in ad revenues.

What’s Wrong With TWTR Stock?

The results were puzzling considering what CEO Jack Dorsey noted in his shareholder letter:

  • Daily active usage increased by 14% on a year-over-year basis
  • There was over 800 hours of live premium video, such as from partners like Sky Sports, Billboard, Condé Nast and GLAAD.
  • TWTR has been implementing machine learning systems to improve the relevancy of tweets.

So why is Twitter having problems with monetization, and why is the company still far from GAAP profitability?

Also problematic is that Dorsey, also the head of Square Inc (NYSE:SQ), remains a part-time CEO. The C-suite is in shambles, with notable turnovers including:

  • COO/Head of Sales, Adam Bain
  • VP of Product, Kevin Weil
  • VP of Engineering, Alex Roetter
  • VP of Global Media, Katie Stanton
  • VP of Business Development, Jana Messerschmidt
  • CTO, Adam Messinger

However, the most worrisome issue for TWTR stock is that the company is essentially being marginalized.

The world’s mega advertisers — which command the bulk of the spending — would prefer much larger platforms. This is why Facebook and Alphabet Inc (NASDAQ:GOOGL) are soaking up the lion’s share of the opportunity.

The lack of scale means Twitter cannot justify transformative ad deals. A prime example of this is the rights to streaming NFL games. Last year, Twitter touted this as a key to its turnaround — but the company was outbid by mighty Amazon.com, Inc. (NASDAQ:AMZN) which is shelling out $50 million for the rights to show it on Prime.

Twitter was left with the scraps, a small deal to stream 30-minute live digital shows about tne NFL, as well as some pre-game offerings.

Facebook is also aggressively bolstering its own efforts with premium content. To this end, the company has recently signed deals to stream e-sports events (with ESL) as well as Major League Baseball games.

So while Twitter has been smart to focus on video, the company will ultimately have a tough time competing among the giants of the tech industry. And that makes it tough to be bullish on the prospects of a sustained turnaround.

The consensus price target for TWTR stock is $14.62, while the current value of Twitter is just under $19. Traders have been driving Twitter higher, but anyone with their eyes on the fundamentals knows that shares probably aren’t worth so much.

Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/why-twitter-inc-twtr-stock-has-20-downside/.

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