When Twitter Inc. (NASDAQ:TWTR) reported its third-quarter results, the company did show some traction. In fact, management indicated that there would be GAAP profitability soon. As a result, TWTR stock jumped from $17 to $22. It was actually the fifth biggest move since the company came public back in late 2013.
Yet since then things have cooled off a bit. Part of the reason is the congressional investigation into the Russian interference with the U.S. elections. For the most part, there are worries that the federal government will impose regulations on the large social networks. That is, they may be treated as media organization, not just technology platforms.
OK then, so what does this all mean for investors? Is TWTR stock a good bet here? Or is it just best to avoid it? Well, I think investors need to be wary, and here are three reasons to consider:
Problem #1 with TWTR Stock: Resources and Talent
While it is encouraging that TWTR is more focused on the bottom line, this still has adverse consequences. Let’s face it, the company must compete against giants like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL), which have enormous war chests to invest in R&D, marketing and acquisitions. Because of this, TWTR has essentially been marginalized as a niche operator.
Keep in mind that a key part of the cost cutting has been to reduce the issuance of shares for attracting and retaining talent. Unfortunately, this is likely to mean that TWTR will not have enough top-notch engineers to keep improving the platform or strong sales people to gin up the revenues.
According to InvestorPlace.com’s James Brumley: “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.”
Problem #2 with TWTR Stock: Stagnation
While FB and GOOGL continue to grow at a robust rate and are highly profitable, the story is very different with TWTR. Keep in mind that the company has suffered declines in revenues for three straight quarters. And yes, the user growth has been meager, with average increases of 4% to 5%. By comparison, FB has been posting gains of about 17% or so.
In light of all this, it should be no surprise that advertisers are losing interest in the TWTR platform. As InvestorPlace.com’s Luke Lango has written: “Clearly, Twitter is still the ugly duckling in the digital advertising world.”
What’s more, there are even signs of a general slowdown in the ad market. This has been the sentiment from operators like Interpublic Group of Companies Inc (NYSE:IPG) and WPP Plc (ADR) (NASDAQ:WPPGY).
Problem #3 with TWTR Stock: Valuation
The TWTR stock price is far from cheap, as the forward price-to-earnings ratio is at a lofty 46X. To put this into perspective, FB trades at 27X and GOOGL sports a multiple of 25X.
Meanwhile, Wall Street analysts are also far from enthused. The consensus price target is $18.25, which implies 8% downside with the TWTR stock price.
What’s more, it is far from clear if the company will be profitable for long. After all, as seen with Facebook, it looks like social networks will need to invest much more in ensuring the safety and compliance with their content. These measures will certainly mean much higher costs for TWTR.
The bottom line is that it looks like revenues will continue to languish and that profits are likely wane. Such a combo is seems, well, fairly bad for the prospects of the TWTR stock price.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.