Trade war tensions are weighing on the stock market right now. But social media giant Twitter (NYSE:TWTR) has bigger problems that will affect Twitter stock.
Namely, the company is doing some house-cleaning by deleting a bunch of fake accounts. And by a bunch, I mean a whole lot. The company has suspended 70 million-plus accounts through May and June, and that number is likely nearing 100 million today.
In response to the fake Twitter account scandal, which was first reported by the Washington Post, Twitter stock has dropped sharply. From $47 to $44.
Is this an opportunity to buy the dip? Or is there further weakness ahead?
I’m inclined to side with the latter. But not primarily because of the fake account scandal. Twitter has just come too far, too fast, and this company doesn’t deserve its present valuation until a few years down the road.
The fake account scandal, which could cause some bumpiness in the numbers, could be the catalyst which causes investor euphoria to die down and Twitter stock to fall.
Here’s a deeper look.
Much Ado About Nothing
At its core, Twitter’s fake account scandal is largely much ado about nothing.
The platform is deleting upwards a million fake accounts per day. Investors are freaking out that when this fake account purge is all said and done, Twitter’s actual monthly active user (MAU) base will be far smaller than its reported 336 million users. That would cause advertisers to pull spend, and make the numbers going forward look quite poor.
But, that won’t happen in any big way.
Twitter CFO Ned Segal has clarified that most of the accounts being purged are inactive accounts, and thus not included in Twitter’s DAU or MAU reporting metrics.
In other words, these are meaningless accounts that don’t add any value to the platform, and their elimination doesn’t really detract any value from the platform, either.
Thus, the numbers won’t be affected by this fake account scandal in any big way. That means time to buy the dip in Twitter stock, right?
Twitter Stock Needs to Cool Down
Not so fast.
The “buy the dip” thesis operates on the idea that there is more upside in Twitter from present levels. But that is a tough claim to make.
Twitter has a market cap of $33 billion. The monthly active user base is 330 million. That means each monthly active user on Twitter is being valued at roughly $100.
Facebook has a market cap of almost $600 billion. Facebook platform’s monthly active user base is 2.2 billion. But if you include the 1 billion users on Instagram, 1.3 billion users on Messenger, and 1.5 billion users on WhatsApp, then Facebook’s ecosystem actually has 6 billion total monthly users. Thus, each monthly active user in the Facebook ecosystem is also being valued at roughly $100.
At the current moment, then, the market is saying that each user on Twitter is as valuable as each user in the Facebook ecosystem. Does that make sense?
Hardly. Twitter’s average revenue per user (ARPU) is anemic next to Facebook’s ARPU. Twitter operates at slim profit margins. Facebook’s operating margins are near 50%.
Twitter’s user base is growing at a 3% clip. The Facebook platform’s user base is growing at a 13% clip, and Instagram is growing far faster (up basically 40% year-over-year). Twitter’s revenue growth last quarter was 21%. Facebook’s was basically 50%.
Overall, Facebook is just a bigger, faster growing, and more profitable company than Twitter. Thus, each user in the Facebook ecosystem is more valuable than each user on Twitter because each user on Facebook brings in substantially more revenue and more profit.
Twitter may get there one day. But not today. Thus, the $100 per user valuation for TWTR stock seems premature at this point in time.
Bottom Line on Twitter Stock
Twitter has come too far, too fast. The fake account scandal won’t cause any big and lasting damage, but it may cause enough noise in the numbers to end the current uptrend in Twitter and spark a downdraft back to the $30’s.
From a fair value standpoint, I don’t think Twitter stock is worth a look for long-term investors until the mid-$30’s.
As of this writing, Luke Lango was long FB.
