Twitter Inc (NYSE:TWTR) was once the notorious example of what not to be on Wall Street. When Snap Inc (NYSE:SNAP) made its Wall Street debut in early March, everyone was asking the same question: Will Snap be another Facebook Inc (NASDAQ:FB) and shoot to the moon, or another Twitter and struggle to stay above its IPO price?
It seems the market has forgotten that sentiment. Over the past three months, TWTR stock is up 25% while the S&P 500 has gained just over 2.5%.
But that dour sentiment was in place for a reason (declining revenues, stagnant user growth, lack of profitability, etc), and investors may want to start questioning the legitimacy of this huge rally.
Is The Twitter Turnaround For Real?
The Twitter turnaround began in late April, with a big first-quarter earnings beat. Over the next several weeks, all the stars aligned for the once ailing social media platform.
Twitter announced a deal with Bloomberg to launch a 24-hour video service, billionaire investor Mark Cuban said he bought shares thanks to the company’s artificial intelligence initiatives, and co-founder Biz Stone rejoined the company on a full time basis.
Lots of good, not a lot of bad. And it all started with an unusually strong Q1 report which underscored Twitter’s growth potential as a live streaming content platform.
The company beat on both the top and bottom lines. Daily usage was up 14% year-over-year, and that continued a multi-quarter trend of accelerating daily usage (+11% in Q4, +7% in Q3, and +5% in Q2). Monthly usage also accelerated. The platform added 9 million monthly active users in Q1 versus a trend of 2-5 million per quarter that had persisted for two years.
This bump in usage can mostly be attributed to Twitter’s live streaming efforts. It was Twitter’s second full quarter of live streaming content, and the platform already streamed more than 800 hours of live premium video and reached 45 million unique viewers in the quarter. That is a 31% sequential increase from Q4. Most of this content is sports (51% of viewing hours), but the content also includes news (35%) and entertainment (14%).
Clearly, there is a future for Twitter as a live streaming content platform. Its short-form, easy-scroll-and-search nature is perfect for live content integration. Twitter is also a conversation-heavy platform, and that is perfect for streaming debate-heavy content, like sports and politics. The more content Twitter live streams, the more usage will go up, and the more valuable the platform will be. All in all, the live streaming growth story is very credible.
But here’s the problem. Even with all this hype surrounding live streaming growth potential, revenue growth remains negative. And TWTR still isn’t profitable on a GAAP basis.
Savvy investors can’t ignore those two things.
Why Investors Should Fade the TWTR Rally
With so many other digital media advertising options out there (Facebook, Snap, and Youtube, to name a few), Twitter is struggling to get advertisers on its platform.
The numbers show this.
Despite a 14% increase in daily usage, revenues fell 8% year-over-year in Q1, led by an 11% decline in advertising revenue. This disconnect between usage growth and top-line degradation will continue. Management continues to expect revenue growth to meaningfully lag user growth in 2017.
To make matters worse, management also said this on the Q1 call:
“Based on what we know today, we do not have visibility on revenue growth improving from the current trend in 2017. The factors that would impact that again would be the execution of us delivering a better ROI story.”
Essentially, then, revenue growth after 2017 is completely dependent upon Twitter executives spinning a better ROI story to advertisers.
They haven’t been able to do that over the past several quarters, so why should they be able to do that now?
Bottom Line on TWTR Stock
Bulls claim that live-streaming is a game-changer in those conversations with advertisers, but Snap and Facebook are also making plunges into both live-streaming and original content. If the current trends persist, then live-streaming ad dollars will flow to Facebook, Instagram, and Snapchat, not Twitter.
In other words, there is no clear inflection point for Twitter’s current revenue headwinds. That makes TWTR stock particularly risky considering it is trading at 46-times non-GAAP earnings estimates for next year.
TWTR stock has had a huge run-up after a strong Q1 report, but the rally feels overdone.
As of this writing, Luke Lango was long FB.
