By now, all market participants are well aware of what is going on at Facebook Inc (NASDAQ:FB). The social media giant has been the subject of intense criticism over user data that was illegally leaked to a third-party political analytics firm. That firm turned around and used that data to influence the 2016 U.S. Presidential Election, so the backlash has been unusually intense for a data leak.
Since news of the data leak went public, FB stock has fallen 15%. Falling alongside Facebook are fellow data-using internet companies, like Twitter Inc (NYSE:TWTR), Snap Inc (NYSE:SNAP), and Alphabet Inc (NASDAQ:GOOG). SNAP stock is down 4%, GOOG stock is down 9%, and TWTR stock is down 18%.
I ultimately still think this whole data leak issue is much ado about nothing for these internet giants. Regulators will slap them on the wrist. Users won’t stop using their platforms. Advertisers won’t pull money.
As such, current headline risks are creating great buying opportunities in some of these names. I’m buying FB, GOOG, and SNAP stocks on this dip.
But one stock I’m not buying here is TWTR stock. TWTR stock remains overvalued. It is as simple as that. There aren’t any data risks here. Nor are there any concerns about regulation or usage dropping.
Twitter stock is simply overvalued at current levels. And for that reason alone, I’m avoiding buying the dip in the stock.
Data Is the Future
There is a lot of noise right now about how big internet companies turn user data into profits. But the reality is that this is happening everywhere, all the time, and it’s not a big deal. In fact, it is actually a good thing for society.
Today’s economy is driven by data. Facebook takes user data and uses it to push ads and posts that users actually care about (so you aren’t just staring at a random feed of random ads and posts that you don’t care about). Same with Instagram, Snapchat, Twitter, and Google. They use data to give their users a better, more relevant, more convenient, and more engaging experience.
Meanwhile, Uber takes data on its users’ rides to predict driver/rider supply and demand, so that drivers are always close and fares are always appropriately priced. Again, a win for consumers.
Airbnb takes data on its users’ searches and preferences to suggest appropriate pricing for hosts, so that hosts get matches and renters get good prices. Again, a win for consumers.
Thus, we see that data is being used everywhere, all the time, to benefit the end-consumer experience. Every once in a while, that data gets in the hands of a bad actor (like Cambridge Analytica) and the data is misused. But 999 times out of a 1,000, data is being used globally to give the consumer a more engaging and simply better experience.
What is going to happen is that governments will simply tighten up regulation a little bit, and then these internet giants will get on with using data to benefit consumers 9,999 times out of 10,000 (you’ll always have a bad actor somehow get in the mix). Usage won’t drop anywhere (I haven’t seen a single person I know use Facebook or Instagram less as a result of this data leak). Advertisers won’t pull money. And all these companies will get back to business as usual.
Twitter Stock Is Overvalued
Some investors are concerned about Twitter’s Data Licensing business. This business comprises nearly 14% of total revenues and more of total profits (it is a very high margin business). With data regulation concerns running around, investors like Citron Research are concerned that this part of Twitter’s business could disappear rather quickly.
For all the reasons stated previously, that isn’t going to happen any time soon. Twitter isn’t doing anything particularly bad here. They aren’t giving away credit card information or Social Security numbers. They are providing sentiment insights to brands, so as to make them more informed and help them create better products for consumers.
Yet again, a win for consumers.
But even with mitigated Data Licensing risks, TWTR stock still isn’t a buy here.
After the recent sell-off, it is still trading at over 50 times trailing EBITDA. FB and GOOG are trading around 18 times EBITDA.
Meanwhile, Twitter has the lowest revenue growth in the group, the slimmest profit margins, essentially zero monthly user growth, and pedestrian daily usage growth. Its advertising business is limping along, and the data business is still too small to drive big overall growth.
In other words, there is absolutely no reason for TWTR stock to have a valuation nearly 3 times greater than that of FB and GOOG.
Bottom Line on TWTR Stock
The numbers just don’t add up when it comes to TWTR stock — and it has nothing to do with recent data concerns.
As such, I think the right move is to buy the dip on FB, GOOG, and SNAP, but continue to avoid TWTR stock until it comes down to a more reasonable valuation.
As of this writing, Luke Lango was long FB, GOOG, and SNAP.