Twitter Inc (NYSE:TWTR) has suddenly become cool again — at least for investors. Keep in mind that Twitter stock has left Facebook, Inc. (NASDAQ:FB) in the dust. For the year so far, FB stock has flatlined, while TWTR stock has gained about 37%.
It’s true that this could be temporary. Let’s face it, the social media world can be quite volatile. It’s also true that FB’s market cap of $511 billion dwarfs the value of Twitter, which has a market cap of about $24.5 billion.
Yet there are some fundamental factors that are driving the improvement of the TWTR stock price. Just consider the following:
– The company has turned profitable. And this has not been by making adjustments; rather, it is on a GAAP basis. This is perhaps the biggest factor in the strong performance of Twitter stock during the past few weeks. Note that during the fourth quarter, earnings per share (EPS) came to 19 cents, compared to analyst expectations of five cents a share. The year-ago EPS showed a loss of 23 cents a share.
– CEO Jack Dorsey has been getting traction with improving the service. Some examples of his efforts include the doubling of the character limit to 280 and the introduction of threaded posts. TWTR has also been more focused on live events as well as video.
– International advertising sales have been robust. During the last quarter, they jumped by 18% to $302 million.
– Engagement has been encouraging. For Q4, there was a 12% increase (although, the company did not disclose the number of daily active users, or DAUs).
There should also been some continued momentum. The Super Bowl and Olympics will likely help bolster engagement on the platform. And of course, President Donald Trump’s avid use of Twitter will be another important factor. For the most part, he is essentially providing lots of free media exposure — almost on a daily basis.
So does this mean there is still upside for Twitter stock? Or should investors be cautious, especially since there has already been a big bullish move?
Well, there are certainly some risk factors that could weigh on the shares. One is that the executive ranks continue to be roiled by turnover. The latest high-profile departure was COO Anthony Noto. He had essentially been a shadow CEO, as Dorsey is the co-CEO of Square Inc (NYSE:SQ).
Next, the profitability at TWTR has been due mostly to hefty reductions in its cost structure. Yet this could stunt the growth of the company. After all, during the latest quarter, there was a 26% slashing of R&D.
This is certainly ominous for Twitter stock as the company’s rivals, like Snap Inc (NYSE:SNAP) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), have been pushing innovation and have been aggressive with acquisitions. Actually, the general lack of resources has already had an impact as the user growth remains sluggish.
For Q4, there was a mere 4% increase in MAUs (monthly active users) to 330 million. To put things into context, FB posted a 14% increase to a whopping 2.13 billion MAUs. Facebook also has other mega online properties, such as Instagram (800 million), WhatsApp (1.4 billion) and Messenger (1.3 billion).
For the most part, Twitter is essentially a niche operator in the social media world.
Bottom Line on Twitter Stock
From a valuation standpoint, it looks like TWTR has already accounted for much of the good news — and then some. Consider that the forward price-to-earnings multiple is at a nose-bleed 49x. This compares to FB’s 20x and GOOGL’s 23x.
In other words, while there may be some opportunities to make short-term trades in TWTR stock, which is natural for volatile tech operators, it could be tough to trade it for sustainable gains.
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.