Time to Bail on TWTR Stock?
If you believed everything analysts said, Twitter Inc (NYSE:TWTR) would have failed by now—and you likely wouldn’t be reading this article. Twitter stock is suffering much less from the company’s performance than it is from the quarterly performance dogma, which holds that companies must be constantly growing at the pace of a rollercoaster.
Larry Fink, CEO at BlackRock, is urging managers of S&P 500 companies and large European corporations to stop focusing on the short term and think more about long-term growth: “Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need,” he said. (Source: “Larry Fink Wants Companies to Talk More About the Future,” Bloomberg, February 2, 2016.)
Twitter stock is one of the main victims of this short-term earnings hysteria. While Twitter has posted growth in both revenue and user numbers, analysts said that these were not as high as they—the Mount Olympus dwellers they purport to be—expected. Twitter stock, already trading at historically low levels, lost 13%, going from $17.73 on Tuesday to $14.94 on Wednesday morning.
For the current quarter, Twitter said it expects somewhere between $590 million and $610 million in revenue. The analysts, on average, expected more than $670 million. (Source: “Twitter’s stock plunges on revenue miss,” Business Insider, April 26, 2016.)
Meanwhile, in the first three months of the year, Twitter’s revenue, which climbed no less than 36%, somehow managed to disappoint the analysts. Twitter said that advertisers failed to increase spending as quickly as the company had hoped.
The analysts, stuck in their constant growth myopia, could care less about the main point of Twitter’s quarterly results: earnings per share were better than expected and Twitter cut its net loss by half in just a year’s time, hitting $80.0 million. (Source: “Twitter Inc (TWTR) is Reiterated by UBS to Buy, Lowers Price Target to $24,” The Market Digest, April 26, 2016.)
That is of great importance to Twitter investors, and analysts appear to have deliberately overlooked it. Not all analysts have, though, given that UBS has reiterated its “Buy” rating for Twitter, but revising its target price from $30.00 to $24.00. (Source: Ibid.)
That is one of the key takeaways for Twitter stock, especially if you don’t have it in your portfolio yet. At this point, Twitter stock has absorbed all the negativity surrounding its prospects—and the price has dropped to a rather affordable level of $15.00 per share.
Investors should also recall that CEO Jack Dorsey has not had that much time to reap the results of his revival plan. He wants to enhance the live broadcast feature via Twitter’s “Periscope” application, simplifying it to make it more appealing to the general public.
The key point is that Twitter cannot fail. The service, regardless of how fast revenue and users grow, is an essential part of modern culture.
Twitter has just celebrated its 10th anniversary. Indeed, it has earned the right to be regarded as an essential tool for media professionals and celebrities, even of it has struggled to expand at the rate analysts demand. Twitter said Tuesday that it has noted more commitment from users, with an increased number of likes, responses, and retweets, suggesting the improvements to services are working.
As for the number of users, the news is far better than analysts would have you believe. In the four previous quarters, Twitter’s audience stagnated or dropped, as in the case of the fourth quarter of 2015. However, Twitter has managed to reverse that trend with 310 million monthly active users reported this quarter (instead of the 305 million three months earlier). More encouraging is that growth is not coming from the U.S.—where there are some 65 million users—but from the rest of the world. This is evidence of great potential. (Source: “Twitter’s user growth in the spotlight: earnings preview,” USA Today, April 27, 2016.)
For now, it seems that investors are not happy about the company failing to reach the high end of its guidance. Twitter stock is down; the company is thus valued at $10.8 billion and has lost 35% of its capitalization since January 1.
Yet, Twitter has improved in every possible way. At the current price, it is worth giving Twitter stock the time and chance that analysts are denying it.