It supposed to be a social media party. As ad dollars migrate from traditional mediums to digital mediums, social media platforms are supposed to be the big winners.
Twitter Inc (NYSE:TWTR) didn’t get invited that party. And it doesn’t look like any invite is coming soon.
Between Facebook Inc (NASDAQ:FB), Snap Inc (NYSE:SNAP), and Alphabet Inc (NASDAQ:GOOG, GOOGL), the social media space is experiencing tremendous growth. Facebook’s ad revenues increased 47% year-over-year last quarter. Snap’s revenue grew more than 150% last quarter. Meanwhile, Alphabet reported ad revenue growth of 18%.
Twitter? Ad revenues declined 8% last quarter. That follows an 11% decline the quarter before that.
In other words, Twitter is the only company with revenue declines in a secular growth industry.
That makes TWTR stock a strong sell here, especially considering the valuation is quite full.
Red Flags Everywhere at Twitter
The writing is on the wall. Twitter is getting desperate.
The biggest red flag, of course, is the fact that Twitter threw out its defining quirk (140-character messages) and replaced it with a bigger version (280-character messages). The company is just testing the new character limit right now, but all signs point to a full-blown roll-out in the near future.
The move makes the platform look a lot more like Facebook. That isn’t good, because Facebook already exists. From this standpoint, it’s essentially a “throw in the towel” move after 8 consecutive quarters of sub-10% user growth (Facebook grew its user base by 17% last quarter — and that user base is more than 6 times as large as Twitter’s).
User reaction to the new 280-character message limit has been mixed. A common theme across Twitter feeds, however, seems to be that users really liked the forced brevity of 140-character messages. Doubling the limit erodes that brevity appeal.
So why did Twitter make this bold move? Simple. Things aren’t going well for the social media company.
RBC Capital Markets released the results of their latest advertising survey and they aren’t good for TWTR. About 21% of Twitter advertisers expect to decrease ad spend in the future. Moreover, those Twitter advertisers that aren’t decreasing ad spend are mostly in the experimental zone with Twitter. If those experimental ad dollars on Twitter don’t yield good results, we could see more advertisers pull the plug.
That isn’t good. At all. It means the ugly Twitter ad growth narrative (ad revenues have fallen in consecutive quarters) could get even uglier.
In fact, Twitter’s revenue growth trends are so bad that eMarketer expects Snapchat’s ad revenues to surpass Twitter’s next year. By 2019, eMarketer expects Snapchat’s US ad revenues to be double Twitter’s US ad revenues.
For context, Twitter has been around since 2006. Snapchat just came onto the scene in 2011.
Beyond the operational challenges, there is also this whole political wildcard which seems to be weighing on social media sentiment. Along with other social media giants, Twitter has been invited to a public hearing of the House Intelligence Committee on Nov. 1. Twitter and others are expected to testify about how Russia interfered with the 2016 Presidential Election.
This may turn out to be nothing, but it’s yet another headwind weighing on the Twitter growth story.
Overall, between desperate moves to rethink the platform, to declining advertiser sentiment, to falling ad revenues, to political headwinds, the reasons to sell TWTR stock just keep piling up.
Bottom Line on TWTR Stock
The most surprising thing about TWTR is that, despite all the aforementioned headwinds, TWTR stock still isn’t a bargain.
In fact, it’s far from it.
TWTR stock trades 51.2 times next year’s consensus earnings estimate. That is nearly twice as expensive as FB stock, which trades at just 26.8 times next year’s consensus earnings estimate.
So, is there any reason to buy TWTR stock?
I don’t think so. This stock looks doomed to be range-bound at best.
As of this writing, Luke Lango was long FB and GOOG.
