To say shares of Twitter (NYSE:TWTR) have been under pressure would be an understatement. Shares have been clobbered over the past few days, with TWTR stock falling almost 30% since Jul. 25.
What happened to Twitter, a stock that was set ablaze last fall and has been streaking higher ever since?
Twitter Earnings Aftermath
First, Facebook (NASDAQ:FB) reported earnings. The company beat on earnings but missed on revenue and told a dire story on the conference call. Seriously, it was like management was trying to get the stock obliterated — and it was. Shares fell about 20% in one day, wiping out some $100 billion in market cap.
This of course weighed on Twitter, which fell several percentage points in the first day of trading following Facebook’s results. The real problem, though? Twitter was scheduled to report that next day, on Thursday. The end results didn’t bode too well for it, either.
Shares fell 20% on Friday and suffered a nasty weekend hangover on Monday, falling another 8%.
Six weeks ago, TWTR stock was at $48. Now it’s at around $32. Some longs were no doubt lured into the stock with hopes that earnings would spring it over $50. Now down big, those buyers would love nothing more than a bounce in order to unload their position.
Worth pointing out is that Twitter received its thrashing despite beating on both earnings and revenue expectations. Earnings of 17 cents per share came in a penny ahead of expectations, while sales of $711 million grew 24% year-over-year.
Coming off a stretch of no profitability and zero revenue growth, the selloff might surprise some investors. The culprit though wasn’t earnings or revenue, it was user growth. Monthly active users (MAUs) dropped 1 million to 335 million quarter-over-quarter. Analysts were looking for a gain of 1 million users, but Twitter’s crackdown on abusive and misleading accounts took its toll.
Evaluating TWTR Stock
Given that Wall Street tends to be forward looking, it’s surprising that TWTR stock is being hit so hard. Some decline? Sure. Maybe knocking it back down to breakout support would be reasonable. But this? After all, daily active users still rose 11% year-over-year, and Twitter is taking steps to make its platform a better place.
I don’t think there’s a way for Twitter to remove
all the “trolls” from its platform or make it an abuse-free social media outlet.
Despite that, Twitter can make it so people don’t make clone accounts of Tesla (NASDAQ:TSLA) CEO Elon Musk, which then appear to be giving away free cryptocurrencies. Accounts like this are all over the place and even for those not easily duped, they are annoying to see. Show me the real content, however ridiculous it is!
I’ll digress a bit and look at the numbers, but ultimately Twitter’s push to improve its platform should be viewed as a positive step. It encourages more users to spend more time on the platform and is better for advertisers.
Twitter now has a $23.5-billion market cap, a more appropriate figure than when it was worth about $10 billion back in April 2017. That’s the main reason we were big buyers last year. That valuation was completely wrong, given the type of breaking and real-time news source Twitter has become. Now that it’s growing its metrics, its value continues to climb.
Analysts expect 20% revenue growth this year and another 13% growth next year. On the earnings front, earnings estimates of 70 cents per share reflect a 60% increase from the prior year. Estimates call for an additional 14% increase in the following year.
That values TWTR stock at about 44 times this year’s earnings. That’s not exactly cheap and is likely acting as a catalyst in the decline.
Trading TWTR Stock
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So what do the charts look like? Well, they’re not good for TWTR stock. In three sessions, shares went from $44 to $31. Near $30, though, and Twitter may be worth a shot.
First, there’s the 200-day moving average, which should give it some reprieve. Second, its gap up from February is near $30 as well and should offer some support (blue line). And finally, an old trend-line should come into play between $30 and $31. Shares are also oversold (green circle), and momentum will likely slow for bears soon (blue circle).
So what’s the play? A solid risk/reward play on Twitter would be to go long near current levels and bail on a close below $30.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
