Is it Time to Bail on Twitter Stock? No! Here’s why
Twitter, Inc. (NYSE:TWTR) took a beating on Wednesday following its earnings call when it plummeted over 10% pre-market, albeit recovering some of the losses in Wednesday’s trading. The company beat on both earnings and revenues but guided lower for the fourth quarter than what the Street was expecting. TWTR stockholders and prospective investors are now skeptical of its future growth. Here’s why I think investors need to stay calm and wait another quarter to form a truly informed opinion instead of buying into the selling frenzy.
I’ve been bearish on Twitter for a while now but there’s no questioning the fact that Twitter, the microblogging web site itself, is a great product. For the hardcore Twitterati, it’s almost an absolute part of their daily lives. Even the non-tweeters sometimes use it as much as the active tweeters to silently follow daily news and worldwide happenings. The problem here is not Twitter as a product; it’s Twitter as a company and Twitter as a stock.
The long-held skepticism over Twitter is its slow user growth and monetization issues, both of which are improving, albeit at a sluggish pace. The third quarter was the most difficult for the company in the absence of a permanent CEO and a clear corporate direction. Hence, this quarter alone is not a good barometer of its future performance. The company may have guided lower but that’s what companies like Apple and Lululemon do, too—guide low and then go on to beat analyst expectations. It’s a strategic move to remain in traders’ good books.
The Positives & Negatives to Watch Out for
A great move underway at Twitter is the introduction of video ads for advertisers and the monetization of its various features. The company is already testing the rising video advertisement trend and got its first advertiser on Promoted Moments last week. I’m certain the company will be able to achieve a good conversion rate from this new feature, should it also acquire a good number of advertisers. The three Twitter-owned social media platforms—Twitter, Periscope, and Vine—all saw an aggregate growth of video views by 150 times in the last six months alone. (Source: “Twitter Earnings Call Transcript,” SeekingAlpha, October 27, 2015.)
In terms of monetization, Twitter reported in the latest earnings call that it currently has only about 100,000 active advertisers on its platform, including small- and medium-sized businesses (SMBs), while the total number of untapped SMBs on its platform stands at an enormous nine million. This is a great opportunity for the company to increase its monetization base in the coming days.
On the downside however, the company needs to work harder to achieve a better number of monthly active users (MUAs). Twitter needs to shed the image of a boring social media platform for the oldies and try to tap into the younger market. Facebook Inc. (NASDAQ:FB), for instance, is used by the youth and old alike and has become so integrated into their lives that it has almost become a lifestyle. The social media giant is quick in responding to user tastes and doesn’t miss out on any opportunity to connect with its users. Twitter’s latest decision to give up on the 140-charater limit in direct messages is a move in the right direction, but it’s not enough.
Additionally, while Twitter is relatively safe from direct competition due to its unique appeal, its two other products—Periscope and Vine—both face threats from competitors like Snapchat and Instagram’s latest product, Boomerang.
Also, it is of great concern to TWTR stockholders that even though the company reported good revenue figures which are up from the last quarter, revenue growth has actually been declining in the last six quarters.
The Bottom Line on TWTR Stock
I was initially dubious about TWTR stock under Jack Dorsey’s leadership, but ever since taking over, he has been moving fast and taking some important steps in the right direction. This is probably why big names like Saudi Prince Al-Walid and former Microsoft chief Steve Ballmer are starting to see value in TWTR stock.
The auto-play video feature, Promoted Moments, and DoubleClick are some of the great monetization moves which were introduced late in the third quarter and will start paying off by the fourth quarter. That’s when TWTR stockholders would be in a better position to gauge its true value. Right now, it’s too early to jump to conclusions.
I’m waiting until the end of the next quarter to better determine where the company is heading.