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Sell Twitter Inc (TWTR) Stock. The Turnaround Isn’t Happening.

Q2 results confirmed everything the bears expected: TWTR stock was running high on hype, not substance.

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It was supposed to be a comeback. Much-maligned Twitter Inc (NYSE:TWTR) was turning the corner, or so it seemed after TWTR stock rebounded from all-time lows in April of this year. Twitter was benefiting from a “Trump bump” as the president of the United States drew attention to the platform through his oddly frequent but sometimes important tweets.

Twitter Inc (TWTR)
Source: Shutterstock

The company was getting its act together on artificial intelligence (at least that’s what billionaire investor Mark Cuban thought). A co-founder returned, initiatives to cut down “Twitter trolling” were implemented, several broadcasting deals were signed and the mobile app was completely redesigned.

From an outside perspective, it looked like the Twitter growth narrative was vastly improving. That is why from the last week of April to Wednesday’s close, TWTR stock jumped 33% higher versus a 4% gain for the S&P 500 index.

And then earnings happened.

Last Thursday, Twitter dropped an egg in its second-quarter report. As it turns out, despite all the hype investors priced into TWTR stock, not much has really changed about the underlying story. User growth is flat, ad revenues are falling and profitability — at least on a generally accepted accounting principles basis — is still just a thing of fiction, like unicorns and spacefights.

Twitter stock dropped 14% last week. But rather than buy the dip, you should stay away from this company. Here’s why.

Twitter Isn’t a Turnaround Story

The big storyline in the advertisement world right now is the secular shift of ad dollars from traditional formats to the digital channel. But this rising tide is not lifting all boats, and instead is propping up a select few — like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL) — while sinking Twitter.

Facebook also reported second quarter results last week, and they couldn’t have been more different than Twitter’s results. Facebook added 70 million monthly active users to its platform in the quarter. Twitter added none.

Facebook saw its ad revenues grow 47% year-over-year. At Twitter, ad revenues fell 8% year-over-year. Facebook grew operating margins by 500 basis points year-over-year to an industry-high 47%. At Twitter, adjusted EBITDA margins grew just 200 basis points year-over-year to a still-low 31%.

The difference is drastic, and it’s only getting bigger.

While the Facebook growth story keeps chugging along, the Twitter growth story is actually falling apart. At this time last year, Twitter was adding 4 million new users per quarter. Advertising revenues were up 18% year-over-year. Adjusted EBITDA margins were up 500 basis points YOY. Now, Twitter is looking at zero user growth, ad revenue declines, and modest margin expansion.

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