If I had to select one name with the most pressure on it this earnings season, I would have to go with Twitter (NYSE:TWTR). Shares of the social media name have soared more than 33% from their 52-week low, and now it is time for results (out Tuesday, June 26) to justify the rally. If the company cannot add subscribers at a time where media attention is at its highest, then I don't know if investors will ever see the name as viable.
Recently, the company signed a bunch of deals in an effort to boost its video presence, mainly with the Pac-12 Network and NBA, along with a simulcast of the Republican and Democratic Conventions in a partnership with CBS News. The stock also has risen since the announcement that Microsoft (NASDAQ:MSFT) was buying LinkedIn (NYSE:LNKD). With Microsoft seeming to overpay, investors think Twitter will be bought next and for a nice chunk of change.
Right now, the headline financials don't seem to matter that much for Twitter, a problem we continue to see with Netflix (NASDAQ:NFLX). Even though the streaming giant reported OK revenues and decent earnings per share, Netflix shares plunged as subscriber growth and guidance fell well short of estimates. We've definitely seen past quarters where the same has happened with Twitter, even when revenues and non-GAAP EPS were well ahead of estimates.
Of all of the names people group in the social media space, Twitter has probably been the hardest name to latch on to. With limits on how many characters can be in a post or how long a video can go on, most have found Facebook (NASDAQ:FB) more attractive. There's also a category of people like myself that use Twitter all of the time to get news and other information, but don't have an account. Many early adopters also have given up on the platform as comments can easily be seen as spam, not relevant, gross, etc. In fact, I encourage all to read this article on why CNBC anchor Kelly Evans just quit social media.
That's why I continue to believe 2016 is the year that Twitter has to prove its relevance, something I previously stated. The US election cycle and Summer Olympics have/will put a tremendous amount of eyeballs onto Twitter, but can the site convert them to users? If Twitter can't grow its user base, why should advertisers remain with the platform? Facebook is projected to do more than twice the amount of revenues during Q2 2016 than Twitter is expected to see for all of this year. Facebook also maintains a revenue growth rate nearly double that of Twitter, despite being at a much larger base number.
So when the company reports earnings on Tuesday, Twitter needs to show it can successfully grow its user base. There will be no Olympics or Presidential election cycle next year, which is why the company must deliver in 2016. Facebook continues to accelerate in leaps and bounds, while Twitter seems to be stuck in the mud. If Twitter doesn't get going rather soon, recent gains will evaporate quickly. At that point, Twitter as an investment will head toward being irrelevant, at which point management should sell the company.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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