New Policy Highlights Headwind for Twitter Stock

Twitter stock - New Policy Highlights Headwind for Twitter Stock

Source: Shutterstock

I’ve been skeptical – if not outright bearish – towards Twitter (NYSE:TWTR) for years now. But Twitter stock has surprised me. Even with the rather large pullback of TWTR stock the last few months, TWTR stock price has risen 20% so far this year.

I truthfully didn’t think TWTR stock price deserved to reach $20, let alone its June high of $47. After all, the company pretty much tried to sell itself two years ago, only to see Walt Disney (NYSE:DIS), Salesforce.com (NYSE:CRM), and Alphabet (NASDAQ:GOOGL,GOOG) all pass on it. With Twitter’s revenue growth stagnant, I simply didn’t see much value outside of an M&A scenario.

But Twitter really has impressed me over the last few quarters. Its margins have expanded, with the company driving solid profits on a GAAP basis in the first quarter and the second quarter. The company’s share-based compensation has come down sharply. Twitter is doing a better job of bringing advertisers on board and of selling ads more efficiently and at better prices. A year ago, it looked like online advertising revenues were going almost solely to Facebook (NASDAQ:FB) and Google. But Twitter seems to have muscled past Snap (NYSE:SNAP), achieving a solid third-place position.

All that said, I’m still not quite ready to forecast another big spike in TWTR stock price. Twitter stock remains relatively expensive. Tougher year-over-year comparisons arrive in Q3. And Twitter still has one thorny problem that is a headwind to its growth and to a potential buyout at some point down the line.

“Dehumanizing Language” and TWTR Stock Price

In a blog post this week, Twitter announced a new policy which will prohibit content that “dehumanizes others based on their membership in an identifiable group.” That represents a modest expansion of the company’s existing “hateful conduct policy.” According to Twitter, dehumanizing speech “treats others as less than human.” One example of that is comparing groups to viruses.

The new policy may be a response to Twitter’s seemingly late decision to ban Infowars founder Alex Jones, who was removed from Facebook and YouTube before Twitter finally suspended him earlier this month. While the new policy seems stricter, it doesn’t provide much clarification. Nor does it seem to resolve the core conflict facing Twitter.

That conflict is the balance between free speech and censorship. And it’s not an easy balance for any social media platform. Indeed, it’s a conflict that has been debated about since before the founding of the U.S. As I wrote after Leslie Jones left the site amid personal and racial attacks back in 2016, it’s not a balance that Twitter can easily strike.

The site already is accused by conservatives and Republicans of having a left-leaning basis. Some have already quit Twitter in favor of free speech-focused platform Gab. Liberals claim that Twitter is too permissive, with women and minorities subject to particularly cruel statements.

That’s not to say that Twitter is useless. Indeed, I’m a heavy user of it myself. But the platform essentially always is going to be upsetting one side or the other. And that does have implications for TWTR stock price.

Can Twitter Grow Further?

There are two issues here. The first is that Twitter’s user growth very well may be capped in the U.S., which is still its most profitable market. Republicans who believe that the site is prejudiced against them aren’t going to join it. Liberals who fear attacks from trolls may also stay away. Indeed, the number of U.S. monthly active users has pretty much been stagnant; the figure was flat year-over-year in Q2.

The second problem is that even some free-wheeling discourse could scare off more staid brands. We’ve already seen advertisers like Procter & Gamble (NYSE:PG) pull content from YouTube due to concerns about the videos that were next to its ads. Those brands aren’t going to go rushing into Twitter if some adult/aggressive content is allowed on the platform. Nor is a company like Disney likely to buy Twitter as long as those concerns linger.

Without “edgy” content, however, some users may simply abandon the site. It’s an exceedingly fine line for Twitter to walk, and while I have no doubt it’s doing its best, there simply may not be a right answer.

Twitter Stock Price Isn’t Cheap

Again, this doesn’t mean that Twitter is going to wither and die. But what Twitter is now probably is pretty close to what it will be. And I’m still skeptical as to whether its metrics justify the current TWTR stock price.

After all, Twitter stock is not cheap. It trades at about 20 times the company’s 2018 EBITDA guidance and about 35 times its adjusted earnings per share (Both ratios were calculated after backing out the company’s net cash). That’s a premium to FB and GOOGL, even though Twitter’s growth doesn’t look particularly extraordinary. If Twitter sort of “is what it is,” and can grind out decent but unspectacular profit growth going forward, TWTR stock price will probably drop.

With a buyout unlikely, the bull case for Twitter stock just doesn’t look that strong at $29, even though its business is performing as well as it ever has.

As of this writing, Vince Martin has no positions in any securities mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/new-policy-highlights-headwind-for-twitter-stock/.

©2021 InvestorPlace Media, LLC