This Cost-Cutting Plan May Not Actually Help Twitter Inc Stock

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Congratulations to those who were brave enough to remain in their position through last Thursday’s Q3 earnings report from Twitter Inc (NYSE:TWTR). The TWTR stock price is still up nearly 20% since then, even with the modest cooling off we’ve seen the last couple of days.

This Cost-Cutting Plan May Not Actually Help TWTR Stock
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If you think the promise of a profit in the fourth quarter of this year is enough to pull the stock out of the doldrums on a permanent basis though, you might want to reconsider. The way CEO Jack Dorsey is planning to produce a profit — by culling stock-based compensation — isn’t without unforeseen consequences. Indeed, a year and a half ago, Dorsey said the company simply couldn’t do what it’s about to do.

He was either wrong then, or he’s wrong now, unless something dramatic and unrecognizable has changed.

Changing Tunes

With executives representing Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Twitter all being grilled by Congress this week in an effort to figure out how, or if, their respective websites may have facilitated interference in last year’s presidential election, one would think the prospect of new regulation would pose the biggest risk to TWTR stock right now.

That’s not the case, however. Far bigger is the potential impact of Twitter’s top brass no longer receiving TWTR stock (and a lot of it) as part of their pay. Stock-based compensation fell 36% last quarter on a year-over-year basis, driving a 16% drop in the company’s total expenses.

In raw numbers, the company’s stock-based compensation expense fell from $158.5 million in Q3 of 2016 to $100.9 million last quarter. For an organization that only drove $589.6 million in sales for the quarter in question, and lost $21.1 million on a GAAP basis, such cost cutting is compelling because real net income seems within reach.

The decision prompts questions about the tune the company was singing in early 2016, however, when official corporate statements noted:

“Competitive compensation, strong leadership and a confidence in the direction of the company are all key elements to having top talent. We are investing in all three areas to ensure we maintain these employees.”

Dorsey has also echoed this sentiment more than once, touting the company’s aim of “hiring and investing in talent” around that time.

In the company’s defense, the bulk of the talent Twitter was trying to attract and retain may already be gone, negating the need now. The so-called “brain drain” of 2016 emptied the ranks of the company’s top management rather dramatically. In the meantime, we learned that former COO Adam Bain and former CTO Adam Messinger collectively left $35 million on the table by not sticking around until 2019, when their stock options would have fully vested. Is it a sign they just know there’s not a lot to look forward to with TWTR stock? Possibly.

Perhaps most of the damage that could have been done has already been done, and there’s no advantage in giving away stock that’s looking increasingly worthless.

Whatever the case, current and would-be shareholders should be asking if the decision to cull costs is going to do more damage than good by obliterating the lingering vestige of employee commitment to the company. Employee loyalty was already under fire thanks to a string of layoffs.

Bottom Line for TWTR Stock

The cost-cutting maneuver will undoubtedly help the bottom line, at least initially, as lowered expenses always will. One has to ask, however, to what extent will weakening compensation packages crimp already-declining sales? Last quarter’s top line was already down 4% YOY, marking the third straight quarter revenue has fallen on a YOY basis.

Twitter is effectively trying to shrink its way to success, and it’s trying to do so by giving fewer and fewer employees less and less to be excited about. It’s not exactly a recipe for bullishness.

Or, maybe stock-based paychecks aren’t actually as important as the company made them out to be a little over a year ago, setting the stage for a crisis of credibility.

Whatever the outcome is, and nobody really knows what that’s going to be, we’re inching closer to a real moment of truth for Twitter and TWTR stock itself. What’s the marketable demand for a microblogging platform’s user eyeballs, and what does it cost to maintain that platform? With only four million new users getting on board last quarter (a snail’s pace relative to the growth boasted by Facebook) and revenue still contracting, the grim prospect remains that Twitter may simply not be viable.

It’ll take two or three quarters to really gauge the difficult-to-measure impact of the newly diminished stock compensation plan.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/cost-cutting-plan-doesnt-help-twitter-twtr-stock/.

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