Twitter (NYSE:TWTR) had its initial public offering in late 2013, pricing its stock at $26 a share. Investors were hungry for what seemed like a young upstart about to make it big, and shares flew up into the mid-40s. The stock had a turbulent time after that, but as it stands, Twitter shares are still holding up: the stock is priced at $38. The issue, however, is that Twitter is still bleeding money. Although the firm is undeniably popular, its user growth is slowing. Can Twitter become the tech giant that it wants to?
Although Twitter is a very young and hip company, it's still publicly traded. The numbers put up by the firm are available to our scrutiny, and even though there must be a certain amount of "belief" with any young firm, it's still worth observing the trends that the accounting sheets may provide us with. First off, the company has a market capitalization of $22.46 billion. This is huge; consider the market cap of Sony (NYSE:SNE) for comparison: $19 billion. Considering that Twitter is a software company, it shouldn't require immense amounts of capital. Its business structure is dependent on getting valuable information from its users. It only needs a certain number of software programmers to build the infrastructure; the company only has 3,000 employees. This combination of factors indicates that Twitter should be able to swing itself to profitability relatively easily; the firm need only capitalize on its existing user base to do so. Revenue growth, however, has been slowing down:
Even though the rate of change of the revenue is slowing down, growth is still very healthy at 109% during the last quarter. Twitter still has a lot of growing to do. In order to fund this, it's maintained very high debt levels, with a roughly 9:1 current ratio (liabilities/assets) a norm now.
Twitter has a lot of assets. Its balance sheet is surprisingly clean for a young technology company - this gives it a degree of maneuverability. It also makes revenue less of an issue, since there isn't debt to pay off. The firm can focus on profit and efficiency, instead. In order to get some numerical insight into the management, we can take a look at a common measure of it, called the return on capital employed. This metric allows us to see if the management is squeezing every last penny they can out of the capital they have deployed to run their business. It appears that Twitter's bottomed out in the beginning of 2014, but has since begun a climb up. Could management be more effective than it was before? Highly likely. As Twitter learns to maneuver itself, it will realize in which spaces it can generate revenue and where it cannot. This will lead to better capital deployment all around.
Market and Market Presence
Twitter has the fundamental outlook of a young firm with young management. This is fine, since that's exactly what it is. What's also worth looking at is other indicators of the firm's continuing success. Twitter has a healthy amount of user acquisition:
Monthly active users of the service have continued rising. Since Twitter proved that it can monetize its current user base, there's no reason that it won't be able to make money off of the people that are signing on now. An important aspect of this metric is the smartphone presence that Twitter is starting to enjoy. As can be seen below, many of the users that Twitter has are on their mobile phones. Mobile devices provide a wealth of information for firms like Twitter to make use of (by selling, for money). The mobile presence of Twitter allows it to compete with mobile heavyweights like Facebook (NASDAQ:FB). In this arena, Twitter is a very serious competitor; it hasn't gotten close to fully monetizing mobile users just yet.
Twitter is still a young firm. Its balance sheet and cash flow statement indicate that it's undergoing a period of heavy growth. What's important is that it has users, mindshare, and the ability to make money. All of this looks good going forward. Most of the numbers that we saw only indicate a certain level of potential, however, so be wary if you're looking to enter the stock. It may take time for it to mature to the level that it can, but it's certainly on its way. I would say that Twitter is a long-term buy, but a short-term hold.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.