Seeking Alpha
Long/short equity, medium-term horizon, hedge fund manager
Profile| Send Message|
( followers)  

Summary

  • We're short Twitter heading into earnings.
  • A decisive shift in investor sentiment could send TWTR shares sharply lower.
  • Lackluster user engagement has been a challenge for twitter and will likely continue to pressure shares.

We love Twitter (NYSE:TWTR). We think Twitter is awesome. We Tweet every day.

We're still short the stock, though - initial short Twitter Inc. entry $56.05 on February 19th. Doubled the position size Feb 25th, nearly doubled it yet again March 7th. We cashed for half profits March 27th, letting the second half ride. We remain short heading into earnings, with first half profits as a buffer. (All setups, entries and exits broadcast real time, and permanently archived, via the Mercenary Live Feed.)

In Strategic Intelligence Report #24, on Feb 22nd, we did a full write-up of our TWTR short thesis. Here's an excerpt:

…here is where the paths of Twitter and Facebook diverge, potentially dramatically… and in favor of Facebook. Whereas Facebook stumbled out of the gate, it righted the ship with success in mobile ads. And Facebook has demonstrated skill in the key areas of social media metrics: connectivity with friends and acquaintances (i.e. user engagement). Indeed, these all-important focal points are what powered Facebook's eye-popping $19 billion acquisition of WhatsApp. And they are precisely what Twitter lacks. A still-sky-high valuation thus leaves TWTR shares vulnerable, as investors lose confidence in the company's ability to maintain lofty expectations.

A decisive shift in investor sentiment could thus send TWTR shares substantially lower in coming weeks and months - fueling our desire to be short.

The bullish investment case for TWTR rests heavily on the company's ability to grow, and monetize, its user base. While Facebook boasts an installed monthly user base of more than 1.2 billion subscribers, Twitter's monthly active user number sits at 241 million. Optimists say this wide differential leaves plenty of room for Twitter to expand its reach and catch up. But so far Twitter has been challenged in its new user quest, and potentially found wanting…

The TWTR story has played out as we anticipated. Twitter is an awesome vehicle and an excellent tool - for those who know how to use it. There are certain members of the "chattering class" - like us you might say - who find TWTR wonderful for sharing thoughts and ideas. There is also a portion of the populace at large who gains benefit from aggregating the thoughts, observations, and general "shares" of creative and interesting people they add to their follow streams. TWTR, in other words, is like a giant cocktail party, business conference, newsfeed and networking event rolled into one.

But here is the problem. The paragraph above does not describe a social media tool that is truly for "the masses." Or to the extent TWTR plays to the masses, it's in a sporadic and half-engaged way. Your ditzy cousin Angela might think it's cool to check in with Justin Beiber or Kim Kardashian, or maybe she will send out a couple "LOLs" to her fifteen followers after the Oscars. But she's going to be about a hundred times more engaged with Facebook (NASDAQ:FB), Instagram, and other social media outlets more oriented to status updates and photos.

Twitter, in other words, has evolved into something a little too sophisticated in respect to long-term user engagement - and not enough "selfie" driven to justify a mass-adoption projection curve (in terms of valuation).

The genius of social media is the way it taps into a deep core of narcissistic, self-absorbed, biology-driven self-regard. The reason teenagers are obsessed with Facebook, Instagram et al with the ferocity of meth addiction is because these mediums play straight to their primal, tribal need to be accepted, liked, and regarded as relevant by peers. Twitter doesn't have that mojo. Its lack of "selfie" power is a weakness.

This is why we're willing to hold our second-half TWTR short into earnings. Articles like this (via WSJ) show how management is flailing:

Twitter Inc. has an ailment that it can no longer overlook: The Internet masses still don't get it.

To address it, the eight-year-old social broadcast network has called on its Mr. Fix-it: Ali Rowghani, Twitter's 41-year-old chief operating officer.

While Twitter has infiltrated mass media, the service has yet to crack mainstream adoption. Mr. Rowghani, who has little product development experience, must find a way to simplify the service. He also must stem a stream of product-team departures.

…When asked how he would fix Twitter's user-growth problem, he responded in his typical matter-of-fact manner, without providing specifics: "There's a bunch of short-term tactical stuff that is already in process that will move the needle. Over the medium term we are going to make a bunch of enhancements to the way early users to our platform sort of become healthy and engaged users, and over the longer term we have a bunch of stuff in the works that will really profoundly impact Twitter and make it better. So it's just kind of methodically developing a strategy and then implementing it."

-WSJ, Meet Twitter's Mr. Fix-It

Translation: "We have no idea how we're gonna fix this, but we're gonna, umm, try some stuff."

As a sixteen-year-old girl might say to her BFF after a break-up:

Sorry Twitter, they're just not that into you…

Source: Sorry Twitter, They're Just Not That Into You