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3 Reasons Why Twitter Stock Isn't Dead Yet

Patrick Sanders

Investors in Twitter stock are celebrating. Co-founder Jack Dorsey announced early today that he's on board as the full-time permanent CEO, with plans to bring the San Francisco-based tech stock out of its downward spiral and make it relevant for shareholders again.

Dorsey, who became interim CEO this summer as Twitter stock (TWTR) was crashing from more than $50 per share to less than the initial public offering price of $26 from November 2013, will also retain the CEO title from his other tech company, Square, a mobile payments company.

"I've been CEO of both companies for over 3 months now. I have the smartest, strongest, and most determined leaders in the world on my teams," Dorsey said in his announcement, which was made in a series of posts on his personal Twitter account.

"Twitter is the most powerful communications tool of our time. It shows everything the world is saying ... 10-15 minutes before anything else. Twitter stands for freedom of expression. We stand for speaking truth to power. And we stand for empowering dialogue," Dorsey tweeted.

Dorsey will have his hands full. In addition to the sudden collapse in Twitter stock price, due in part to a horrendous first-quarter earnings report that sent the stock crashing by more than 20 percent in a day, Twitter has been plagued by oft-repeated criticisms that it wasn't doing enough to increase engagement and suffered from what early investor Gary Vaynerchuk called "a massive fire hose" of noise. To make matters worse, Twitter is under the huge shadow of Mark Zuckerberg and Facebook (FB), which has incorporated Twitter's signature hashtag into its own algorithms and is reportedly working on a competitor to Twitter's mobile-advertising distributor. Facebook also owns Instagram, the photo-sharing service that continues to grow in popularity.

So with all those problems and challenges from competing tech companies, is there any reason to invest in Twitter stock?

Absolutely, financial experts say.

"I think the company has tremendous potential and has for years now," says Joshua M. Brown, a financial advisor and CEO of Ritholtz Wealth Management in New York and an avid Twitter user. "I think there's an ebb and flow in all social networks ... one day something is the biggest thing ever, and then the next, it's utter despondency and back again."

So if this is truly a low tide for Twitter stock, let's look at three reasons TWTR may regain its former glory:

Twitter's financials. Although Twitter got butchered by Wall Street for missing expectations in the first quarter, the company's second-quarter earnings -- the first under Dorsey -- were much improved. Revenue of $502 million topped analysts' expectations, and advertising sales were up more than 60 percent, reaching $452 million.

"Twitter was caught up in the early August downdraft affecting the whole market in general and momentum stocks like Twitter in particular," says Barry Randall, chief investment officer at Crabtree Asset Management in St. Paul, Minnesota. "But Twitter's problems, like annual revenue growth of only 61 percent in its June quarter, are problems a lot of companies would like to have."

Wall Street typically rewards stocks for topping expectations and punishes those that do not, and it's clear Dorsey does a better job than Costello at managing those expectations. He got good marks from pundits for publicly recognizing Twitter's biggest problem -- slow user growth -- and that gives investors confidence the company will address the problem going forward.

Twitter's impact. No matter what the event is -- dancing sharks with Beyoncé at the Super Bowl halftime show, the NBA Finals, the Golden Globes, the Oscars or serious events such as the Ferguson protests -- Twitter is a place that draws people. Buckingham Palace has used Twitter to announce news of Prince William's engagement and the birth of Princess Charlotte, and news events such as the Boston Marathon bombings and the safe water landing of US Airways Flight 1549 -- the "Miracle on the Hudson" -- were first reported on Twitter.

On any given day, about 500 million tweets are sent on Twitter, and the company boasts about 302 million active users.

"Twitter has everyone that matters -- 90 percent of the world's leaders, kings, celebrities, rappers and athletes. They have total ownership of every single live event. Nobody is watching those events and sitting with Facebook on their phone or laptop," Brown says. "There is a lot of opportunity when you have every major organization and when you have total ownership of these kind of live events."

Twitter's future. One reason Twitter isn't making money -- yet -- is that it is investing in new projects without an immediate return. In April, Twitter spent $100 million to buy the Periscope app that allows users to broadcast a live stream on Twitter. The idea is good enough that Facebook (natch) revealed its own livestreaming service, called Live, this month.

And Twitter signed a two-year extension of its deal with the National Football League that will allow it to show more highlights. That feeds directly into Twitter's strength as a location for big moments and events.

Perhaps just as importantly, Dorsey earlier this year bought (and tweeted about) 31,000 shares of Twitter stock, bringing his total holdings to 21.85 million shares. The purchase was a sign to investors that Twitter executives have confidence in the company, and that triggered a mini-rally in stock price.

"Twitter needs to stop flogging itself for being Facebook's lesser rival and recognizing that along with its priceless brand name, its growth trajectory and its ability to generate positive cash flow are among the strongest in media. And at heart, Twitter is a media company," Randall says.

In the long term, Brown is optimistic about Twitter stock, despite the challenges and competition from other tech companies.

"I think that it has tremendous value," he says. "I don't know what the stock is going to do tomorrow or next month or by the end of the year, but nobody does. But if you think about this company being a global utility, there's tremendous potential for the future."

Updated on Oct. 5, 2015: This story has been updated to reflect Dorsey's appointment as CEO.



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