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Better Wait for a Pullback Before Buying Twitter Inc Stock

James Brumley

On Tuesday, our very own Josh Enomoto argued there was little point in buying into Twitter Inc (NYSE:TWTR) now. Twitter stock had already rallied more than 40% for the year, with roughly 12% of that gain taking shape since its early February earnings report.

Between stagnant revenue growth and slowing user growth, the bullishness, he suggested, just wasn’t built to last.

All his points are well taken too.

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I’m going to take one step back and look at things from a longer-term perspective though, and suggest this stock may well be a decent pickup after a healthy pullback Josh may fear is looming. In short, CEO Jack Dorsey’s plan to shrink Twitter’s way to success might actually pay off.

Just Enough Hope

Credit has to be given where it’s due. The fact that Twitter was able to withstand the muscle of market-leading Facebook, Inc. (NASDAQ:FB) and resist the advent of a much more dynamic from Snap Inc (NYSE:SNAP) app Snapchat is impressive. In fact, it’s almost unbelievable.

And yet, there it is. Last quarter, Twitter created its first-ever GAAP profit of $91 million.

It was an ugly victory to be sure. Revenue was actually down 2% year-over-year, and average revenue-per-user (one of Enomoto’s key concerns) actually fell, while the total number of monthly users only grew 4%.

Most of the swing to a profit was the result of steep cost-cutting, and those cuts may well do more harm than good.

Perhaps worse, the future is anything but rock solid. The microblogging platform can still be a fairly uninviting place, with harassment and trolls and bots remaining pervasive. Dorsey is looking to fix that, but such fixes could end up having an even direr, traffic-crushing effect.

Or, for better or worse, maybe nothing Dorsey does will actually make Twitter’s debates any healthier or make the platform welcoming for all.

Whatever’s in the cards, however the ARPU is falling, and however slow user growth seems to be, the fact of the matter is, earnings are rising, and now that Dorsey has found the right formula, revenue is expected to rise too.

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This is the palatable balance of advertising and engagement, the balance of spending and saving, Twitter stock holders have been waiting on for a long time. Now Dorsey just needs to scale up the whole shebang. Analyst believe he will.

Timing Is Still Everything for Twitter Stock

That being said, I absolutely agree with Josh on one matter, the chart of Twitter sock is just as important as the company’s fundamentals, as it reflects the market’s ever-changing opinion of the company’s future.

To that end (and calling a spade a spade), Twitter stock is overbought here. Up around 150% since April of last year and still valued at well above the market norms relative to sales and profits, it’s difficult to imagine traders exacerbating the matter… at least without taking a breather first.

After a decent pullback though, that bearish argument may be pointless.

From a psychological standpoint, there’s something significant about the $23.78 area (yellow, dashed). Twitter stock has found support and resistance there in the past, and by the time it could be tested as a floor, the 200-day moving average line (purple) would be around that value as well.

That seems like the most likely floor once, and if, the buyers let up on the current rally.

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If not the $23.78 area, one of the other moving average lines plotted on the chart are likely to bring an even quicker end to any pullback. You’ll simply have to wait and watch, looking for the usual reversal clues when those lines are revisited.

However it takes shape, if Twitter is still showing user growth and profit growth at the time, even muted revenue growth (and even modestly declining revenue) shouldn’t prevent Twitter stock from mustering a recovery effort.

Bottom Line for Twitter Stock

This is what it’s all about… balancing a stock’s current price with the company’s plausible prospects. In this case, the stock’s frothy valuation forces investors into trying to figure out how other traders are going to see TWTR shares in the immediate future.

Welcome to the dance.

Again, my take is mostly in line with Josh’s near-term thinking; we both suspect you’ve already missed this boat, so to speak. I’ll just add that the fundamental stage is set to launch another boat after a healthy correction.

In fact, the timing is ideal. By the time the stock peels back and regroups, Twitter will have had another chance to show us another quarter of fiscal progress.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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