Twitter Inc Stock Is Hot, But Don’t Get Too Excited

Although improving, TWTR stock still faces tough fundamental challenges

By Josh Enomoto, InvestorPlace Contributor
If You Liked TWTR Stock Before, You Should Like It More Now

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If the markets handed out awards for comeback rallies, Twitter Inc  (NYSE:TWTR) would be among the top contenders. After years of fruitless and usually painful meanderings, TWTR stock finally looks like a respectable opportunity. With the TWTR stock price up 27% this year, Twitter will have the chance to claim something that has eluded it since its public launch: end a complete year in the black.

TWTR Stock Is Hot, But Don't Get Too Excited
Source: Shutterstock

The only time that the TWTR stock price resembled a strong investment was in November of 2013.

That of course was when the company had its much-ballyhooed initial public offering. In a little less than two months, shares gained nearly 42%. It appeared that Twitter was going places, but it was a facade. Since January 2014, it’s been mostly a downhill ride, accentuated by the occasional head-fake.

To be frank, TWTR stock is a bearish trader’s dream. However, those who believe the social media firm’s “ugly duckling” reputation is coming to an end have valid points. Management has focused strongly on returning value to advertisers. As InvestorPlace contributor Chris Lau notes, Twitter has cut unproductive services and invested in other areas to attract advertiser dollars. In addition, the company shows evidence of diversifying its revenue stream.

The entire platform has changed, too. Rather than the usual 140-character tweets, you now have 280. Perhaps the idea was to drive more user engagement. If anything, President Trump is no doubt extremely appreciative.

In my view, the most important piece of evidence lies in the technicals. The efforts are working. Since May 2016, the TWTR stock price is charting higher lows. Now, the only question is whether it has the potential to chart higher highs.

TWTR Stock Faces Tough Fundamental Challenges

While some elements look promising, Twitter faces a mountain of challenges. Ironically, its efforts to drive more value (such as cost-cutting initiatives) end up hurting its comeback chances. I believe InvestorPlace writer Tom Taulli best sums up the dilemma. He writes:

“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:GOOG,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.”

Aside from the resource issue, the other major headwind is user volume and engagement. Internet-usage experts predict that by 2020, Twitter will leverage nearly 35% of the U.S. social media population. However, Twitter growth as a segment of online Americans has largely flat-lined since 2014. I’m not sure if raising the tweet count to 280 characters will do much for the TWTR stock price.

To its credit, Twitter attracts a fairly wide demographic balance. While approximately 37% of users are ages 18 through 29, a good 25% belong in the 30 through 49 bracket. By no means is Twitter as demographically slanted to youth as Snap Inc (NYSE:SNAP).

Still, Facebook does a better job of attracting people from all demographics. Furthermore, it hit it out of the park with mid-range to older millennials, who have significant buying power.

Twitter Just Isn’t Appealing

At the end of the day, what makes Facebook special is utility. Whether you’re in high school, just starting out in the workforce, or a retiree, the network has something for everyone. Twitter, I’m afraid, lacks usefulness. Therefore, the TWTR stock price is unfortunately capped.

I think management desperately wants to change this image by making its platform broadly appealing. But unless you’re a high-level celebrity, a business with something to sell, or the commander in chief, Twitter doesn’t offer much. Certainly, if regular folks want to connect with each other, they’ll do so through Facebook or even Snapchat.

I suppose Twitter could change itself to be less ephemeral and more substantive. But by doing so, it loses its core identity — brief blurbs which are (hopefully) shared by millions. The formula works, but it’s not nearly as effective as the current TWTR stock price suggests.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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