Here we go again. Twitter Inc (NYSE:TWTR) stock is climbing. In fact, TWTR stock now has regained much of the ground lost after an abysmal earnings report in late July. There’s been little in the way of TWTR news to drive those gains, but optimism about Twitter stock has persisted.
I’ve long been skeptical of Twitter stock and it’s somewhat surprising to me that TWTR has maintained its current range since early 2016. After all, the news surrounding Twitter has not been good — at all.
User growth has decelerated, with MAUs (monthly average users) flat quarter-over-quarter in Q2. Revenue and profits have declined so far in 2017. Free speech controversies have hit the platform, including the Leslie Jones incident last year and more recent concerns about Russian involvement in the most recent presidential election and the alleged unequal treatment of differing political views.
And yet, Twitter stock has risen 13% year-to-date. There is some value in TWTR stock — but an enterprise value just shy of $10 billion seems far too high. This is a company that is barely profitable when backing out stock-based compensation. It’s not growing on the top line. Yet investors continue to treat Twitter stock as if better days are ahead. At a certain point, I still believe that optimism will end and TWTR stock will fall accordingly.
Twitter Stock on Its Own
Twitter has two ways to grow revenue:
1) It can increase users.
2) It can increase revenue per user.
As for the former, growth looks reasonably tough looking forward. Again, the user base didn’t grow at all in Q2. And it’s hard to imagine what can possibly accelerate growth in MAUs from the current 328 million. Donald Trump’s extensive use of the platform has provided millions of dollars’ worth of free publicity worldwide. One analyst has even estimated that Trump alone is worth some $2 billion to TWTR stock.
Twitter perhaps has some room to drive increased usage overseas. 40% of revenue in the first half of the year came from outside the United States, per the company’s 10-Q. And the numbers were better internationally, with Q2 revenue down 7% in the U.S. and just 1% elsewhere.
Still, the user base here largely seems to have matured. And with concerns across the political spectrum about either too much censorship or too much negative speech — concerns that leave Twitter in an no-win position — there’s going to be constant erosion going forward as well. I’m just not sold on the idea that Twitter is going to drive all that much user growth going forward.
That leaves per-user revenue as the only driver. And engagement does seem to have improved of late, with DAUs (daily active users) climbing double-digits in recent quarters. (Twitter doesn’t disclose the exact DAU number, however.) But one key reason why I’m bearish on Twitter’s pivot to video is that it significantly lowers advertising rates. On a two-year basis, cost per engagement declined 83% in Q2. That’s a problem for revenue — and for margins.
After all, Twitter’s new video strategy requires it to pay for content. That’s a pretty radical change in the business model. The attractiveness of the social media business model, as seen at Facebook Inc (NASDAQ:FB), is that users create the content for free. Twitter’s efforts to drive content from everyone from the Pac-12 to Bloomberg to Buzzfeed adds another layer of expense. But Twitter, excluding stock-based compensation, already is barely profitable as it is.
TWTR Stock as an Acquisition Target
I’m simply baffled by the idea that Twitter can get lower ad rates, pay increased costs and somehow grow earnings. Admittedly, ad engagement rises significantly with video. But as first-half results show, it’s not enough.
Meanwhile, both the numbers and the strategy undercut the case for Twitter being an acquisition target. Just this week, InvestorPlace columnist Tom Taulli argued against the likelihood of such a buyout — and I’m inclined to agree. After all, companies like Walt Disney Co (NYSE:DIS), Salesforce.com, Inc. (NYSE:CRM) and Alphabet Inc (NASDAQ:GOOGL,GOOG) already have kicked the tires on Twitter stock. Twitter clearly was for sale last year — and no one was interested.
Why would this time be different? The video strategy puts Twitter in direct competition with companies ranging from Amazon.com, Inc. (NASDAQ:AMZN), to whom Twitter lost its NFL deal, to Netflix, Inc. (NASDAQ:NFLX) and Facebook, among many others. Are one of those companies really going to spend $12-$15 billion plus cash to buy TWTR stock out — or just spend that money on their own content?
The consistent optimism toward TWTR stock seems to just ignore any bad news. But the problem is that most of TWTR’s news is bad. This is a barely profitable company with limited growth prospects. It’s a highly unlikely acquisition target.
It’s not worth $10 billion — or anything close to that figure.
As of this writing, Vince Martin has no positions in any securities mentioned.
