Social media platform Twitter Inc (NYSE:TWTR) wants to be the primary news source for its users. That was one of the key takeaways from its annual investor day for TWTR stock holders: Twitter believes its biggest fans “get all their news from it.”
That’s quite a tall order, but I think it could be true. I use Twitter often, and based on who I follow, most of the news that’s important — or at least important to me — comes across my Twitter feed. From that sampling of one, extrapolate accordingly.
Becoming the main news source could help TWTR capitalize on all the eyeballs reading the roughly 500 million tweets its users generate every day. It’s help that Twitter needs, because if recent results are any indication, it has a huge task ahead.
Those results include first quarter sales that fell 8% to $548 million. Advertising revenue fell an alarming 11% (it dropped 17% in the U.S. but grew 1% internationally). Data licensing revenue jumped 11%, which attests to the potential of Twitter selling usage and related data to advertisers and other interested parties (such as those who want to see if the mention of a stock can help boost its share price).
A long way of saying, TWTR stock has a long way to go.
No Money From New Users
Quarterly earnings were negative, shares outstanding increased, and Twitter said it “expect[s] advertising revenue growth to continue to meaningfully lag that of audience growth in 2017.” In other words, it can’t find a way to make money from the new users on its platform.
Twitter tracks several user metrics across its global user base. It tracks daily active users (DAUs) and monthly active users (MAUs). Both grew steadily in the first quarter. Daily active users grew 14%, though a total DAU count seemed missing from the earnings press release and the follow-up material.
MAUs increased 6% to 328 million, roughly the population of the United States — a user number that few companies can boast. Within that figure, there were 259 million U.S. MAUs, or 7% more than the previous quarter. International monthly active users improved 6% to 70 million, for 21.3% of total.
Similar Strategies
Twitter’s analyst day followed the earnings release, but didn’t reveal anything earth shattering. Increasing the use of video fees is a primary focus, but that’s nothing new. A similar strategy being pursued by Facebook Inc (NASDAQ:FB) and Apple Inc. (NASDAQ:AAPL) to increase usage among its platforms. Live e-sports continues to take off across most social media.
Twitter said three trends are holding back its monetizing the expanding user base: “long lead times for sales cycles; a higher level of ongoing competition; and, the impact from revenue products and features that we deemphasized, discontinued or did not launch.” I didn’t see any compelling initiatives to offset these trends.
Cash flow trends are improving. Twitter estimated it generated $440 million in free cash flow last year, or roughly 60 cents per diluted share. Off that metric, the free cash flow multiple of 29x is quite reasonable. Analysts project full-year 2017 earnings of 33 cents, and 40 cents in 2018.
TWTR Stock: Show Me Something
Twitter is getting there, but the progression seems slow as molasses right now.
I’ve gone through the latest company news and updates a number of times now and can only come to the conclusion that Twitter is a show-me stock. Its credibility isn’t high right now as growth initiatives are failing to bare fruit. This, despite rapid growth in digital advertising and the convergence of the internet and mobile computing.
Given the current valuation of TWTR stock, social media rivals including Facebook and Alphabet Inc (NASDAQ:GOOGL) seem better choices right now. Their valuations are similar, growth is much more robust and consistent, and there is ample profit generation. Until Twitter’s top or bottom-line trends improve, the stock will only tread water.
Twitter stock is fairly valued. There’s growth potential, but the company is having trouble executing right now. Cash on the balance sheet has grown to $4 billion, so there is little risk that Twitter will go out of business any time soon.
There are better growth opportunities in tech, but Twitter remains a curiosity for now.
Investors have little option but to go with the current trends of falling sales, increasing users and a slow march toward profitability. We’re waiting for an inflection point and the return of rapid growth, but there’s nothing on the horizon to suggest that will happen anytime in the near future.
As of this writing, Ryan Fuhrmann owned shares of Alphabet and Facebook.
