Twitter: Hanging On A Shoe String

| About: Twitter, Inc. (TWTR)

Summary

Twitter's Q2 can be characterized by stagnating MAU, weak revenue and a disappointing outlook.

With revenue and the MAU story broken, expect further downside risk to estimates and re-rating by the analyst community.

25x forward earnings is a trap at best. The only viable outcome remains a sale of the company.

Twitter's (NYSE:TWTR) Q2 earnings are disappointing at best, with revenue missing estimates, although EBITDA and EPS were higher on cost savings. MAU was largely in line, suggesting that MAU growth remains the single biggest challenge for the company. More importantly, guidance was way below consensus, suggesting that the recent initiative on video streaming and TWTR's current user base are not enough to draw advertisers onto its platform as they migrate toward the more established social media channels, such as Facebook and Instagram (NASDAQ:FB).

The stock's -10% decline post earnings is a clear statement from investors that they have lost faith in the company's ability to turn around. Note that TWTR's story is contingent upon two key factors: user growth and revenue growth. Historically, sell-side analysts have been focusing more on revenue growth and less so on the eroding operating metrics, such as users and engagement. Revenue growth could support the stock until revenue decelerates, which is what we have here. TWTR's current state of stagnating user growth and decelerating revenue growth is Wall Street's biggest fear, so investors can expect further downside revision and re-rating in the coming days.

While TWTR remains a vital digital content and media outlet, its competitive advantage is eroding as FB ramps up on mobile messenger, which, I believe, could become the next gateway for media and social networking consumption. With the turnaround remain challenged, the board should entertain a sale of the company while there is still value in its MAUs and ad clients. As I mentioned in my preview note, traditional telecom and cable companies are looking to scale up their own digital content. TWTR will be an attractive asset for these companies as they bundle its content into their mobile handsets and TV set-top boxes as viewers can receive tweets along with live coverage of key events, such as sports and breaking news. I continue to believe a sale is the best outcome for TWTR, and the current valuation of 25x forward earnings looks more like a value trap rather than a value play given the weak fundamental outlook.

Revenue of $602 million missed the consensus estimate of $607 million, while EBITDA of $174.6 million beat by $20 million and EPS beat by $0.04. MAU of 313 million was largely in line with consensus 312 million, and mobile MAU represents 82% of MAU. The biggest disappointment was the guidance, in which TWTR expects $610 million in revenue versus consensus $681 million and EBITDA of $135-150 million versus consensus $169 million, suggesting that higher content cost and ad spend could weigh on profitability in the coming quarters.

I remain bearish on the stock.

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.