Twitter, Inc. (NYSE:TWTR) has been going through a tough time this summer, as its stock price forecast has turned sour, several of its product heads have departed, and its rate of user base growth has slowed.
Going forward, there are several major concerns regarding financial fundamentals and corporate leadership. On the macro side, Twitter is struggling to maximize mobile revenue. On the micro side, it still needs to finalize its choice of CEO.
Twitter Stock is Off-Limits During Leadership Limbo
Both Todd Jackson and Christian Oestlien announced their decisions to quit the company earlier this summer, and another key executive, Trevor O’Brien, has also decided to leave the social media company. (Source: Bloomberg, last accessed September 3, 2015.) O’Brien was in charge of the company’s main apps. (Source: Invest Correctly, last accessed September 3, 2015.)
Going forward, the company’s board is facing increasing pressure to appoint a new CEO and convey some message to shareholders. Mounting uncertainty over leadership will give rise to discomfort among both internal stakeholders and external shareholders if this situation is not resolved in a timely manner.
Translation: nothing positive is likely to happen until Twitter comes up with someone to lead the company.
Hovering in the area of $26.00, Twitter’s stock price has underperformed in the last 52- weeks, and no amount of optimism regarding upcoming products and appointments of new executives can hide that fact.
The company has indeed rallied somewhat lately and reversed its downward trend, but its stock value is still down 44.95% year-on-year, which is worse than the S&P 500 Index. While Twitter has managed to achieve earnings improvements, it has not inspired confidence in the company among market investors.
Of course, Twitter’s recent woes in the stock market are part of a broader trend in equities markets. Slumping commodity prices and the threat of a Chinese stock market collapse have sown the seeds for a bear market across many industries. Though this makes it a good buy for investors looking at Twitter from a long-term perspective, you would have to stomach a considerable amount of risk to buy into its stock at the moment.
Here’s the bottom line: Twitter has improved its financial position, but this is deceptive because the company is still trailing behind competitors.
Year-on-year return on equity increased quite dramatically, underlining that there is substantial strength to Twitter from a financial point of view. (Source: Twitter, last accessed September 3, 2015.) However, when you compare Twitter to other companies in the Internet Software & Service sector, as well as the overall market, its return on equity lags considerably behind the industry average and the S&P 500 Index.
Twitter’s gross profit margin is quite high at the moment, standing at 81.05%. (Source: The Street, last accessed September 3, 2015.) Still, despite the company’s high profit margin, it is still less than it was a year ago. (Source: Twitter, last accessed September 3, 2015.) The net profit margin of 27.20% was a serious letdown in comparison with the industry average. (Source: Yahoo, last accessed September 3, 2015.)
Net operating cash flow, however, has gone up by 10.13% to $89.98 million, compared to the same period last year. Following the same pattern, Twitter’s cash flow is still below the industry average growth rate of 19.34%.
Twitter’s low debt-to-equity ratio may seem attractive at 0.44. (Source: NASDAQ, last accessed September 3, 2015), but it is yet again higher than the industry average, which suggests that debt levels need to be examined in greater detail once the key leadership positions are filled.
Charts Say More Downsides for Twitter Stock Ahead
But let’s take a look at the technical side for a moment.
Twitter’s stock seems poised for a short-term trade which offers an attractive risk-to-reward ratio.
Chart courtesy of www.StockCharts.com
Support was found in the $26.00 range, roughly in the area of the company’s IPO price, and upside resistance was seen in the $35.00 range, which was the support late last year and in May and June of this year before turning into resistance in July. The $26.00 bottom-support was tested last week and held firm, being penetrated slightly but closing above it, displaying a robust bullish candle reversal.
More bullish movement can be seen on the daily chart, giving lift to the stock as it powered over the $26.00 resistance. While this suggests stability, it doesn’t yet qualify Twitter as a good buy until it sorts out its financial and leadership issues.
Chart courtesy of www.StockCharts.com
All in all, Twitter has too many issues in the air for it to be a good buy. But there are changes on the horizon which may herald better news. Twitter has a strong marketing campaign in the works, as well as an upcoming feature which will collect tweets around specific subjects. These moves could well improve the social media platform’s prospects for the future.