In a way, Twitter Inc (NYSE:TWTR) is the modern-day newspaper. The service has become a way for millions of people to get their daily news. But as seen with TWTR stock, Wall Street is far from convinced about the economic model.
The lagging financials look more like a traditional newspaper operator. For the past year, Twitter stock is off about 13.5%.
The irony is that the company is at the intersection of various growing categories, such as mobile, video and social media. But unfortunately, these have become winners take all markets — that is, the lion-share of the digital ad revenue opportunity has gone to Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB). According to a report from the Wall Street Journal, these two giants scooped up over 77% of the spending in 2016.
Can Twitter Stock Handle the Pressure?
In light of all this, it should be no surprise that TWTR stock has been under much pressure. Just look at the latest earnings report. Total revenues fell 5% to $574 million and ad revenues dropped 9%. This came after the first quarter’s overall 8% decline of the top line and a 11% drop in ad revenues.
As for the full-year, the deterioration is likely to continue. Here’s what the letter to shareholders had to say: “While we are encouraged by the improvement in our overall revenue trends, we do not expect to see our total revenue growth rate improve in the second half of 2017 due to headwinds in the second half (of approximately $75M) associated primarily with de-emphasized revenue products.”
Then again, it does not help that the TWTR user base has remained fairly sluggish. Granted, there was reason for optimism in Q1 when there was a 9 million increase in Monthly Active Users (MAUs). But it appears that this was a one-off as TWTR benefited from the election of President Trump. For Q2, there was zero growth on a quarter-over-quarter basis and the annual increase was a mere 5%. The U.S. market also saw a decline of 2 million users on a year-over-year basis.
Now TWTR has tried to sugar coat things. To this end, the company has been highlighting its Daily Active Users (DAUs), which increased by 12% on a year-over-year basis. Yet there has been no disclosure on the actual number. In other words, it’s tough to get a sense of what the increase really means.
OK then, what about the video efforts? Might this help boost TWTR stock? Well, the problem is that the company has been late to the game. Again, FB and GOOG have ramped up their video offerings. Then there is Snap Inc (NYSE:SNAP), which has become the must-have for the young generation. The company has snagged high-profile deals, such as those seen with a $100 million agreement with Time Warner Inc (NYSE:TWX).
As for TWTR, the company just does not have the financial resources to compete in this fiercely competitive market. For example, in 2016 the company struck a deal with the NFL to stream videos. But then for this season, Amazon.com, Inc. (NASDAQ:AMZN) bid $50 million to swipe the deal.
This is what Jefferies analyst Brent Thill has recently noted: “Twitter’s push to be a digital live video provider is interesting, but we note that bigger competitors such as Facebook and Google have much stronger digital video propositions for advertisers with much larger and more engaged user bases, deeper granular data for targeting, and proven return on advertiser investment.”
He downgraded Twitter stock with a “hold” and put a $16 price target on the shares.
Bottom Line on the TWTR Stock Price
A year ago, Twitter was growing the user base at about 5 million a quarter and the revenues were ramping at double digits. But of course, things have suddenly come undone. It looks like the company is quickly becoming marginalized.
Oh, and TWTR stock is still far from cheap. Consider that the forward price-to-earnings multiple is 48X. By comparison, FB trades at 26X and GOOG sports a multiple of 23.4X.
In other words, if the problems continue, which seems reasonable, there could be further downside with TWTR stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
