Long-embattled social media firm Twitter Inc (NYSE:TWTR) enjoyed a small, but meaningful reprieve this year. Facing nothing short of complete disaster in early spring, TWTR stock suddenly rebounded. On a year-to-date basis, we’re witnessing an event that hasn’t occurred in quite some time – positive returns.
And in the recent third-quarter Twitter earnings report, Twitter finally impressed there, too.
Many TWTR stock investors were pessimistic. As InvestorPlace feature writer James Brumley notes, the TWTR earnings report could get “rough.” In fact, Brumley views it as a critical pivot that will “either suggest the microblogging site is finally on the right track or confirm it’s simply beyond salvaging.”
But I’m not entirely sure if a good report helps investors or not here. Because there’s more at play than just Twitter earnings.
First, let’s talk about the fact that TWTR stock enjoys the benefit of low expectations. This lack of pressure worked wonders for former President George W. Bush when he squared off against candidate Al Gore. But investors aren’t as easily swayed as voters often are.
In social media, you’re nothing without advertisers. Facebook Inc (NASDAQ:FB) understands this concept and geared its business accordingly. Snap Inc (NYSE:SNAP), if it is to have any chance of avoiding becoming a casualty, must get its act together.
But even after a strong report that showed user growth, Twitter must prove to investors its future relevancy. This brings me to my second point: the company needs subscription growth. Sure, TWTR news currently draws much attention, thanks to President Trump. However, in order for TWTR stock to thrive, the underlying social-media network needs broader ad engagement and revenue — not just users
TWTR Stock May Have a Relevancy Problem
Unless the social-media platform can somehow pull a rabbit out of a hat, I can’t imagine Wall Street getting excited about TWTR stock for more than just a few days after these recent earnings. Without a reasonable belief that Twitter can convert its monthly active users (MAUs) into advertising dollars, shares are essentially deadweight.
Besides, the long-term track record of user growth isn’t great. In the trailing two years since Q2 of this fiscal year, the company’s MAU growth rate increased less than 8%. Contrast that performance with the timeframe between Q2 FY2013 and Q2 FY2015, where MAU growth jumped more than 39%.
![TWTR, MAUs](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
From where we stand, Wall Street has three major problems with TWTR stock. First, Twitter struggles to convince freeloaders to join their bandwagon. All the incentives to sign up, including the (false) aura of being connected with your favorite celebrities, to the live streaming of professional sports games, failed. But somehow, management will convince advertisers to take a major risk? I doubt it.
The second problem is the competition. Why should advertisers and investors go with a speculative opportunity with a failed strategy when they can join a winner? Facebook, despite breaking 2 billion MAUs, is actually growing at a faster rate than in prior years. Nothing short of remarkable, that is.
Plus, let’s face facts. Aside from President Trump dropping his wisdom nuggets, the TWTR news cycle is fairly bleak. Most regular folks just don’t get Twitter, which brings me to my third and final point: Twitter is useless.
Normal People Don’t get Twitter
Utility isn’t necessarily a barometer of whether TWTR stock is a solid investment. After all, older people probably find the whole industry to be useless. But for Twitter, it’s a critical vulnerability because the company needs to justify itself financially.
Unfortunately, the platform is a confusing mess that only celebrities, bloggers, and certain businesses find useful. The central motif here is narcissism. If Katy Perry broadcasts herself brushing her teeth, she’d find a massively receptive audience. If our aforementioned feature writer James Brumley did it, his account might be forced to shut down.
Practically speaking, Twitter is a niche market for a niche audience. Yes, the company claims a ton of MAUs. But who really engages this network outside of Trump and celebrities? Facebook is much more user-friendly, where its members can keep up with people they actually care about.
On the other hand, Twitter is about feeding narcissism to an already self-absorbed crowd. Based on its MAU growth curve, it’s evident that the trick is getting old. It’s also the reason why the markets are hesitant on TWTR stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.