The past two months have been exact opposites for Twitter (NYSE:TWTR). In April, Twitter stock gained 21% on the month, five times the performance of the S&P 500. Fast forward to May, and it’s down nearly 5% for the month.
Two opposite monthly performances likely have investors wondering if the Twitter stock price is headed to either $30 or $40 in June.
I don’t have a crystal ball. All I can say is if it does drop below $30, it’s a screaming buy. Here’s why.
A Lot Has Changed in the Past Year for TWTR Stock
Last August, I wrote an article about Mark Cuban selling his Twitter stock and what that meant for other stakeholders.
Cuban exiting had very little to do with TWTR stock itself. Instead, he preferred moving more of his equity investments to cash. Given what happened to equities in the final three months of 2018, it wasn’t a dumb move.
As for Twitter, I made a case for and against holding onto its stock.
The argument for holding shares came down to the fact it was delivering profitable quarters and growing free cash flow. Those were two criteria I felt were necessary if TWTR stock ever wanted to see $70 again.
The argument against exposure had everything to do with its declining user base. At the time, TWTR had just released its second-quarter 2018 earnings results that saw its monthly active users drop by a million on a sequential basis. The news knocked 20% off the Twitter stock price.
On August 14, 2018, shares were trading around $33. I finished off my article by suggesting that below $30, TWTR stock was a bargain. I wrote:
“Now that it’s producing consistent profits, I believe the company can make more money by better engaging its users rather than focusing on trying to keep growing its user base. Eventually, the fact that real people are benefiting from using the platform will renew its user growth.”
I emphasized my bullishness, stating “Below $30, Twitter is a bargain. If you already own it, I wouldn’t sell; instead, I would wait for an entry point below $30 to buy some more.”
Since that article, the Twitter stock price has dropped below $30 on two occasions. The first occurred in October and the second in December. Having gone on a run in 2019, TWTR is up over 32% year-to-date.
However, it’s been on a downhill slide since early May.
A Stronger Business
Twitter stock surged April 23 on first-quarter earnings that beat the consensus estimate by 22 cents. Additionally, revenues beat analyst expectations. I won’t go over the other significant numbers in Q1 2019 because they’ve been covered elsewhere on many occasions.
What I do want to emphasize is that the doubling of free cash flow from $135 million to $271 million tells you everything you need to know about Twitter stock.
Business is good, and it’s still getting better. Plus, it’s much improved from this time last year.
“Other than Facebook, it’s the only social media play that’s actually profitable,” Jim Cramer said May 20 on CNBC’s Mad Money. “At 33-times next year’s earnings, it’s not exactly cheap, but I think it may turn out to be a bargain in retrospect.”
I don’t think there’s any doubt Twitter is a stronger business as we head into the second half of 2019. The question is, where does its stock go in the near-term? History suggests that moving below $30 for a short time is definitely in the cards.
So, here’s what I would do if I was an actual or prospective owner of TWTR stock.
The Bottom Line on Twitter Stock
If you own Twitter, I wouldn’t sell it. There are too many positives with its business at the moment, including stronger financials and better user experience. The social-media firm continues to experiment with its app to make it more conversational while also testing more ads on users’ Twitter feeds.
All of these are tailwinds for Twitter’s future stock price.
So if you own, I would continue to do so, putting some cash aside should it revisit $30 for the third time in less than a year.
If you don’t own Twitter stock, I would buy a little today and wait to see if it drops to $30 or lower. I realize I’m suggesting you take a possible loss on the first buy. However, timing the market is notoriously difficult. Besides, if Twitter stock goes higher and stays higher, you’re still making money.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
