Twitter (NYSE:TWTR) CEO Jack Dorsey has had a huge success with the breakout of Square (NYSE:SQ). He has aggressively expanded the product offerings and has seeing quite a bit of traction with the Cash payments app. For the past year, SQ stock has logged a sizzling return of 243%. Unfortunately, the story for Twitter stock is not as rosy.
Dorsey is still also at the helm of Twitter. And since July there has been quite a bit of deterioration. Note that the shares have plunged from $47 to $29.
OK then, perhaps this is just temporary? Maybe Dorsey can bring some of his magic to Twitter stock? Well, there are certainly some positives. Twitter remains a large platform and the company has reached profitability. The company has also returned to growth on the top line (in the latest quarter, revenues jumped by 24% to $711).
But despite all this, I still think there are some tough challenges — which may take time to work out, making it difficult for Twitter stock.
So let’s take a look:
Drop in MAU Makes Twitter Less Attractive for Advertisers
During the latest quarter, Twitter announced an 11% increase in daily active users. While this was certainly a positive, it was not helpful for investors. The reason is that Twitter does not disclose the actual number of users!
So instead, investors focused on MAUs (Monthly Active Users), which showed some trouble. There was a net one million reduction to 335 million on a year-over-year basis. The Street, on the other hand, was looking for a much more robust 338.5 million. Twitter said some of the reasons for the fall included the purge of fake accounts and the adverse impact from the newly enacted European privacy laws. Even worse, the company forecasts there will be another drop in Q2, in the mid-single-digits millions.
Regardless of the reasons, a declining user base is certainly a negative. Let’s face it, advertisers want scale — and Twitter is already a fairly niche player. So if the user deterioration continues to stall, then there could easily be an hit to the top line.
Struggles to Handle Politics Could Still Hit Twitter Stock
Twitter is a go-to source of news for millions of people. While this makes it a powerful platform, there are also major risks. We’ve seen how it can be abused, such as by the Russians. There are also complex issues with the First Amendment. Should certain people be banned — like Alex Jones, who operates Infowars?
Finding the right balance is no easy feat. But Twitter really has no choice. Going forward, the company will need to monitor the content creation.
Yet this will not be cheap. Cutting-edge tools like AI (Artificial Intelligence) and machine learning will not be enough. Twitter will have to hire more people to deal with maintaining the platform — and this will drive up expenses.
According to MoffettNathanson analyst Michael Nathanson, this could make it tougher to keep up the profitability. Because of this, he recently downgraded TWTR stock from $23 to $21.
Twitter Stock Could Suffer From a Lack of Innovation
Dorsey has made some changes to the Twitter service, such as expanding the character limit. But the moves have been mostly minor. There is nowhere near the kind of innovation seen on Dorsey’s Square.
The irony is that the focus on profits may be making things difficult. There are few resources to work with — especially compared mega operators like Facebook (NASDAQ:FB).
But for the long term, if there is a lack if interesting new features, the user base will probably continue to languish ––and this will make it tough to achieve sustainable growth.
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.
