Twitter (NYSE:TWTR) stock had enjoyed a dramatic rise higher until recently. The San Francisco-based social media company saw its stock rise by about 160% between October and June. However, an earnings report that saw a user base drop sent TWTR stock plunging.
Twitter thrives as the company continues building its niche. However, TWTR stock struggles as concerns over the use of the site and political controversies weigh on the stock. Amid a strengthening niche and political issues, valuation and growth should remain the focus for TWTR investors.
Twitter Finds Strength Within Niches
Since plunging by over 28% over a three-day period following its last earnings report, Twitter stock has seen a slow, but steady move upward. Even though I have remained a consistent TWTR bear for a long time, I find myself coming to a mea culpa on this stock.
When I first wrote about the stock last October, I declared it will always stay a “stock of the future” and compared it to Myspace. At this stage, even I acknowledge that the worth of TWTR stock comes in higher than the $17-per-share where it traded at that time.
Twitter’s strength comes in social media niches. It has long remained the platform of choice for celebrity figures. Even in reposting my articles on various social media platforms, Twitter has given me more engagement than the others. Also, in my view, the character limits strengthen the niche by making posts easier to digest.
Now, the company has expanded to other niches such as high school football and the Overwatch League. Where I live in Texas, high school football reigns supreme, especially in small towns. Each of these teams enjoys a sizable fan base, especially when future college stars play. Multiply that by all the ranked high school football teams across the country, and that can add up.
The deal with Overwatch League matches will gain a similar type of interest. And in both cases, the Twitter platform plays well with those who want to leave a character-limited comment. This represents a win over Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), who could have gained this following for its YouTube platform.
Dorsey Testimony Could Affect TWTR Stock
Despite these gains, I expect Twitter’s struggles to see more focus in the near-term. The next defining event for TWTR stock will come when CEO Jack Dorsey testifies before the House of Representatives on Sept. 5. Here, Mr. Dorsey will have to defend his company against allegations of bias against right-leaning users.
Ideally, for Twitter stock investors, Mr. Dorsey will want to show that he protects the integrity of his site without alienating large numbers of conservatives. We learned last year from Starbucks (NASDAQ:SBUX) how taking unnecessary political stands can hurt a stock. Also, as we saw with Mark Zuckerberg and Facebook (NASDAQ:FB) stock recently, any misstep during testimony can send the stock plunging. Hence, investors should hope for lack of fireworks here, political or otherwise.
Twitter Stock Remains Overvalued
TWTR stock trades at about double its value from last fall. However, despite the massive drop after earnings, the plunge still leaves its forward price-to-earnings ratio at just over 50. Although it has made significant strides this year, compared with archrival Facebook, it is still the “little brother.”
Even with this second-tier status, it trades at more than twice the forward P/E of FB stock. One might justify this higher multiple on growth. Analysts expect average annual profit growth for Twitter to come in at 32.4%-per-year over the next five years. For Facebook, they predict 22.2%.
For this reason, I can see paying a somewhat higher multiple for TWTR stock than for FB. Still, I do not see paying double on a P/E basis. Even if we take the most generous valuation and growth stats, TWTR appears at least 20% overvalued. I could see myself recommending a position at a lower level. However, at this multiple, investors should watch and wait.
Bottom Line on TWTR
Investors should carefully watch the deals and the controversies surrounding Twitter. They should also focus on valuation and growth for TWTR stock. The company has successfully built a niche around celebrity engagement. It also appears poised to succeed with combining the power of microblogging with sporting events ignored by larger players.
Even with these benefits, the struggles with growing its user base and with navigating political controversy remain. Amid these challenges, we also have Twitter stock trading at higher multiples than the dominant stock in this space, FB. Twitter deserves some measure of praise for taking market share that could have easily gone to much larger players.
However, given its valuations, growth issues and political controversies weighing on TWTR stock, I would stay away for now.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
