Twitter (TWTR) released its Q4 earnings after hours Wednesday and the stock tanked over 17% in after hours trading. For a stock market darling that has had a spectacular run since its initial public offering, it was a debacle for those who recently purchased the stock.
What went wrong?
On December 16, 2013 I put out an article suggesting it was time to short the Twitter bubble and on January 6, 2014 another article suggesting that investors might want to take a "short ride" on Twitter.
Both articles made the same point. As popular and interesting as the Twitter phenomenon is, it is overvalued by a country mile. It is one thing to be enthusiastic about the prospects for a company but entirely another to bid its stock up into the stratosphere and Twitter was definitely in a rarefied atmosphere. Twitter's market value per user had gone through $57 at that time and higher since. At the close before the earnings report Yahoo.com showed a market capitalization of $36 billion. Divide that by the 241 million Monthly Active Users ("MAU") Twitter reported in its after-hours earnings release and you get a value per MAU of about $150, making it more valuable than Facebook (FB) or YouTube on the basis of that metric.
The report showed some pretty impressive growth statistics but the one that really caught my eye was the growth in "stock-based compensation" which totaled a little over $600 million and just about equaled the loss for the year.
I had to look twice because for a moment I thought I was inadvertently reading a salesforce.com (CRM) release.
To put the stock-based compensation number into perspective it is about triple what Twitter spent on Research and Development or on Sales and Marketing or about nine times what it spent on General and Administrative Expense. I found the largesse obscene by any measure. At some point in history the brilliant young managers who create new and exciting businesses may decide that part of their opportunity is to develop a statesmanlike demeanor and set an example of moderation and conservatism in the way they lead. Self-indulgence is neither a necessary nor desirable component of good management and greed and avarice are not the elements of humanity for which one should seek praise.
Strong management that creates value should be handsomely rewarded without doubt, but the reward should bear some resemblance to the actual earnings created so that the "compensation" paid to management is paralleled by growth in earnings and ultimately in dividends to the investing public who the company may need for funding at a future point.
Twitter is an interesting and important communications network and will play an important role in disseminating news and other information worldwide for many years. For it to play an important part in your investment strategy, you may want to watch it from the sidelines or walk on the short side of the street for the next few quarters.
I am long Twitter puts at a $66.50 strike price for which I paid $5.06 per share a bit before the close of trading. I expect those puts may be more valuable in the morning.