Twitter (NYSE:TWTR) opened for trade May 21 just about where it started the year. In today’s market that makes TWTR stock a star.
There are metrics through which you can still call the stock cheap. The price-to-earnings ratio of 20.6 is close to that of the market. You’re just paying 7.22 times last year’s sales. There was $7.6 billion in cash and short-term securities on the books at the end of March. You’re paying just 17.5 times operating cash flow.
But there are problems with TWTR stock, from an investment standpoint. Where is future growth coming from, especially after Donald Trump leaves the White House? Why buy a stock that doesn’t pay a dividend? Where are the synergies that will lift Twitter’s value over the present $25 billion?
Twitter remains a puzzlement.
The Global Dumpster Fire
We think of Twitter as American, but its reach is global. So are its problems.
For example, Burundi turned Twitter off on its Election Day to reduce violence. Politicians are going to jail for tweets. India’s government wants prior restraint of Twitter “fake news” and “instigation,” which presumably it will define. In Pakistan, the government is accused of turning off Twitter when opponents met.
Governments also go on offense with Twitter. The British government is going after press critics with tweets. China is conducting a global propaganda program with tweets. President Trump is responding in kind and celebrities want his account turned off.
Far from being a global town square, Twitter has become a global dumpster fire. In the face of this, Twitter is trying to back away from its no-holds-barred approach. Misleading tweets on the novel coronavirus are being blocked. That tells governments Twitter content can be controlled.
All the issues involving speech and provocation, by governments or individuals, are falling into Twitter’s lap. It’s being asked to be a global censor of first resort. You want to buy a piece of that?
Competitive Pressures
Twitter began as a short messaging service. But it now takes all kinds of files.
The gold lies in filtering the content. It can not only be filtered to target ads, but to target people. Pre-screening of social media content by employers is now routine.
But competitors want a piece of that. The $400 million purchase of Giphy, and its free moving .gif files, by Facebook (NASDAQ:FB), seems aimed at getting a piece of Twitter’s data flow.
The balance between content and advertising can be hard to discern. Turning Twitter’s potential into revenue is an art. Anyone can tweet and buying Twitter promotion is like buying TV ad space. As with TV, most of Twitter’s ad value goes to creatives, not to Twitter.
That’s the business problem. Twitter can be used for good as well as evil. Twitter has little control over what it’s being used for at any time. Since it’s already global, and already multimedia, the question becomes whether it has reached its full potential.
The Bottom Line on TWTR Stock
You invest in companies for growth or for profit.
TWTR stock grew only 13% in 2019. Revenue in the first quarter was just 2.7% ahead of the year before. Twitter reported a small loss in the March quarter. Its profitability remains very inconsistent. It continues to hoard its cash. It is slowing its pace on acquisitions, which now seem more defensive in nature than offensive. It last made new content acquisitions in 2016.
We may indeed be reaching peak Twitter. Investors should ask where future growth is coming from before buying. That’s certainly what potential acquirers are asking. Reports of Twitter being bought used to be everywhere. Now they’re theoretical, what-if stories.
From where I sit, Twitter looks to be fully valued.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in FB.
