I’ve been a fan of the Twitter (NYSE:TWTR) platform for ages. I opened my account there in 2009 and I have since used it everyday. I was also an early fan of Twitter stock. As far back as 2017 when most were fleeing from it, I bid to buy it at $9. I sold $9 insurance puts to investors who felt it could fall below $8 per share.
Here was another article I wrote in March of 2018 recommending a bullish position that was an easy win. Overall I’ve been bullish on it but not today.
The User Metrics Are Seriously at Risk
Now that we’ve established that I am not a hater or a perma-bear we can go on to the reasons why I am bearish now. Even up to last week TWTR stock was one of my bullish ideas for 2021 on a very specific thesis. Last year they announced the acquisition of Squad, which is a company with Zoom-like features.
My reasoning for seeing an upside surprise was that TWTR was finally monetizing its user base. After seeing the social media shenanigans unfolding now, I have flipped that bullish sentiment and have gone the other way. I expect Twitter stock to be significantly lower in the coming months.
This may come across as a political statement but I assure you that it’s not. I rarely let my emotions get in the way of a good trade. Prior to this week, my bullish thesis revolved around the user metrics. This doesn’t work if management is actively and significantly reducing that count.
The current storm that’s rising in social media against its censorship is a problem for metrics. Alienating users is not a problem if the company that is awash with them is like Facebook (NASDAQ:FB). But it’s a major problem for Twitter because it has not grown its userbase in years. Furthermore, Facebook U.S. users are a tiny fraction of its total counts. That’s not the case here.
I think management is taking a big risk by kicking out the “@realDonaldTrump” account. 19% of Twitter’s adult public accounts used to follow the President there. That’s a big chunk to jigger in this manner.
Regardless of the eventual outcome, their crusade kills my thesis for going long. I booked my profits and will go the other way for the rest of the year. I reserve the right to change my mind when more facts come out. The air is murky around social media companies these days. Even Elon Musk is getting in on the action with his attack on Facebook.
I don’t remember writing many bearish articles on Twitter stock. Here is another bull call from November of 2019. The stock now is still about 65% higher than that entry point. Clearly I am not an alarmist, but I am a realist. There is trouble ahead.
Twitter Stock Has Technical Hurdles to Overcome
The other reason for my caution is purely technical. The rally this month failed at almost exactly the point it did in December. Since October of 2014 $56 per share has been a roof. That is a lot of scar tissue to go through for the bulls. They will likely need a better running start to come back at it with more force.
Twitter stock has rallied 181% from the pandemic low into the December high. Giving back some, even if it means falling to $39 per share, would be a positive development.
I say this because it would give the bulls the opportunity to rotate out of the weak hands into stronger ones. In the process, the TWTR chart would draw a “handle” to the massive bullish pattern called a “cup and handle.” It is taking the stock since 2014 to develop it so it would bring about a monster rally.
Valuation matters and this is not a cheap stock by any means, especially relative to its competition. Since 2016 management grew sales by about 35% but they still lose money. This sounds like a solid accomplishment but it pales in comparison to Facebook, the other social media platform in the news. FB management nearly tripled its revenue and its net income. Furthermore, the user base growth rates are in two different galaxies for these two.
My point is that the fundamentals don’t make for a good bullish argument without a specific thesis. That’s why I am noting the technical aspect of the opportunity earlier. Price-to-sales for Twitter stock is 11.3x, which is not outrageous but it’s definitely not cheap. Owners of the stock now expect a lot of its future revenues. They are giving it more than 11 years worth of sales in the stock price today.
Facebook is almost 20% cheaper on that front. For another absolute comparison I offer you Amazon (NASDAQ:AMZN) with a price-to-sales of just 4.5x. AMZN grows 30% every year for over a decade. Investors should not give Twitter stock almost three times as much credit as the ultimate growth company.
I am not bashing it for spite, but it’s important to be honest about what’s baked into the stock price. With its lackluster results I must either rely on the technical trigger or establish a thesis to chase upside opportunities. In this case I contend that it needs a dip in order to present the next breakout opportunity.
There Are Extrinsic Risks
Lastly, there’s also the matter of fact that stocks do not trade in a vacuum. The stock market in general has never been higher. In fact, the small-caps, which is a basket of 2,000 stocks, made new all-time highs hours ago.
I am not calling for an absolute short of the markets, but there is definite reason to be somewhat cautious. Twitter stock will need the help of the overall markets. Chasing big upside in it assumes that the markets are nowhere near a top.
If you force me to trade it from the bullish side now, I could sell put spreads way below the current price. Otherwise I think waiting out the Twitter stock chase for a few weeks would be a good thing.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
