The company’s innovations have been lagging and the user growth has remained sluggish. True, the TWTR stock price has staged a nice rally during the past few months, but the long-term record is still awful.
During the past five years, Twitter stock is off about 47%.
By now, you’re probably wondering, is there any hope left for TWTR stock at this point? Maybe Dorsey can use his Square magic on Twitter? It’s possible, but I would still be wary.
The fact is that Twitter stock is likely to face some major headwinds.
Major Headwinds for TWTR Stock?
One headwind for Twitter is that the company has severely limited resources, at least when compared to its mega rivals like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). According to research from eMarketer, these two companies are likely to take 63.1% of U.S. digital ad spending this year. Furthermore, FB and GOOGL offer key advantages, such as massive user bases, multiple platforms and granular targeting.
This is why InvestorPlace contributor Luke Lango pointed out: “Clearly, Twitter is still the ugly duckling in the digital advertising world.”
It also does not help that there could even be an overall slowdown in the ad market. Just look at the recent poor performances of companies like Interpublic Group of Companies Inc (NYSE:IPG) and WPP Plc (ADR) (NASDAQ:WPPGY).
In light of all this, it should be no surprise that TWTR has seen a deceleration of its growth.
|First||-8% to $548 million|
|Second||-5% to $574 million|
|Third||-4% to $590 million|
Now Dorsey has been trying to find new ways to pump up the monetization. For example, the latest move is to focus more on data licensing (this category currently generates about 14% of overall revenues). The plan is to develop APIs that will make it easier for app developers to access the data. It’s similar to what Twilio Inc (NYSE:TWLO) does.
But there are some issues. First of all, the data may not necessarily provide much value. After all, advertisers have been reluctant to spend on the TWTR platform, right?
Next, it takes time to roll out a new business. In other words, even if the program is successful, it could easily take a few years for there to be revenues that move-the-needle for TWTR stock.
Bottom Line on TWTR
Square has the advantage of being useful on a daily basis. In fact, the app is a critical part of many people’s businesses. Because of this, Square is has an engaged user base.
But this is generally not the case with Twitter. Here’s how InvestorPlace contributor Josh Enomoto put it: “Twitter, I’m afraid, lacks usefulness. Therefore, the TWTR stock price is unfortunately capped.”
This helps explain why the user growth has been at only about 4% to 5%. By comparison, FB has been growing at a 17% ramp, despite its enormous scale. But then again, this platform has been geared as a utility.
Finally, TWTR stock remains fairly expensive, with the forward price-to-earnings multiple at 50X. This is not only much higher than operators like FB and GOOGL, but it is 18% above the $18.60 consensus price target from Wall Street analysts.
So all in all, it’s tough to make a bull case on TWTR stock right now, especially since there is little evidence that growth will return any time soon.
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.