Twitter's (NYSE:TWTR) shares have hit all time-lows in the past days. Prior to Wednesday's earnings, shares have stabilized just under $15, a far cry from $50 highs in early 2015. In mid January, I recommended, as part of my ongoing Twitter short article series (first piece in July 2015 at $31.47), to refrain from investing in high-beta tech stocks. Since then, high multiple stocks, such as Netflix (NASDAQ:NFLX) and LinkedIn (NYSE:LNKD), have taken another nosedive. TWTR's shares have lost another 15%. In this article, I contemplate Twitter's earnings and the question whether we have found a bottom.
Earnings: More of the same
From Twitter's shareholder letter:
Total average monthly active users (MAUs) were 320 million for Q4, up 9% year over year, compared to 320 million in the previous quarter.
Excluding SMS Fast Followers, MAUs were 305 million for Q4, up 6% year over year, compared to 307 million in the previous quarter.
Mobile MAUs represented approximately 80% of total MAUs.
MAUs have plateaued and maybe peaked. In fact, if you look into the letter under "audience," you will see that while MAUs excluding SMS followers have grown 6% YoY, they actually decreased from 307 million to 305 million between Q3 and Q4. The initial after-hours reaction was erratic with temporary lows just over $13 before a recovery over $14. Expect more volatility in the coming days. I won't go too much into Twitter's revenue guidance as you can retrieve it from its letter or SA News. The main takeaway is that so far, none of the new product initiatives (e.g., Moments) have had meaningful impacts on Twitter's user base.
Can you see the bottom?
Ever since Twitter began falling off its highs, we have seen a discussion about "the bottom." With shares just over $30, some contributors (like notorious former Twitter bull Alex Pitti) called a bottom, be it because of Jack Dorsey's return as halftime CEO or Periscope turning around engagement and user growth.
Next, $25 was a bottom, just because. Then $20. Is $15 it? Calling bottoms is a pointless exercise mostly based on a human preference for round numbers. Calling bottoms means timing the market. Buying the dip generally does not work, especially not in a bear market. Since Twitter has gone from $33 to $15, nothing has materially changed about its growth prospects or cash flows. Let us instead focus on the two relevant questions:
- Do I want to own Twitter based on its current cash flows and growth prospects?
- If not, can I expect any material events that will cause it to change AND those events are not priced in for some reason?
Twitter is currently valued around $10 billion and just posted FY 2015 results of $2.2 billion in revenues with a net loss of $521 million. Revenue will continue growing as the company is building more sophisticated ad products. Interestingly, Twitter also has increasing revenue from data licensing ($70 million). This is not the problem. Its problem is keeping users engaged. Even if monthly active users were growing, the question is how much time do these users spend on Twitter versus Facebook (NASDAQ:FB), Instagram or even Netflix? Facebook has an ecosystem to connect and interact with friends. Twitter has punctually interesting stories that you also read about in your Facebook "trending" section. I have elaborated extensively on Twitter's lack of a clear use case for most people that do not need to manage an audience professionally or narcissistically.
With regard to the second point, there are two possible catalysts. One is management drastically changing the product in a way that sparks new growth. Not happening so far. Maybe the newly unveiled algorithmic timeline will keep users interested. So far it is just getting them upset. The other one is a brilliant acquisition. Periscope was hailed as one, but Facebook has swiftly reacted. Who could Twitter acquire (that it can reasonably afford) to create a catalyst? Let me know if you have an idea because I don't.
Acquisition? Wishful thinking
Ever since Twitter's shares have been falling off their peak, various contributors have brought up again and again the possibility of an acquisition. If you search for Twitter takeover rumors (or have followed the stock for a while), you will find headlines like "Twitter soars amid (Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Facebook...) takeover rumors" every other month. I have a problem with the argument that a company should buy something because it is cheap. When Facebook bought WhatsApp or Instagram, they were not cheap. In fact, at the time, many thought Zuckerberg was completely overpaying for businesses that had nothing but user growth. Of course, hindsight is 20/20 and Instagram turned out to be a great acquisition while the value of WhatsApp has yet to realize itself.
The point of this is that being cheap is a bad reason to buy a company if it does not inherently provide value for your business. Buying Instagram made sense because it provided a massive mobile growth opportunity. Twitter might generate some FCF some sunny day at the end of this decade, but acquiring it would only make sense if it provided someone with an attractive opportunity to integrate it into their business.
In my opinion, it is much more likely that Facebook slowly suffocates Twitter through WhatsApp and Instagram, as it has already integrated live videos to combat Periscope. Maybe Twitter will eventually get picked up by an acquirer. Even Yahoo (NASDAQ:YHOO) has some interested suitors, and YHOO is at least as grossly mismanaged as Twitter. Buying Twitter because of a likely acquisition is wishful thinking at this point and not reason enough to own it.
Conclusion
Twitter posted strong revenues, but MAUs and engagement remain a problem. As global equity markets are tumbling, only risk-hungry investors with a lot of patience should consider Twitter here. Management is essentially trying to squeeze out as much revenue as possible from a potentially shrinking user base. Even if it becomes cash flow positive from those efforts, the future looks bleak if MAUs decline more. While there is a chance Jack Dorsey and his rotating C-suite find ways to eventually turn Twitter into a stable real-time news cash machine, I am not seeing this yet so I have no reason to buy.
Further, the current market climate does not favor high-multiple tech stocks and Twitter's P/E is still above the S&P 500 average. If a bear market is coming, investors have no business in stocks like Twitter. Don't try to call arbitrary bottoms just because you are eager to get in. Instead, wait to find out whether new products can convince you that MAUs have not peaked.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
