I’m the first to admit that I’m as baffled by Twitter Inc (NASDAQ:TWTR) as the next investor. When Twitter news hits the market, TWTR stock goes nuts. Everyone sees “potential”, but nobody is really able to articulate what that potential is.
Sure, it seems like TWTR could gather tons and tons of users, advertising to them could be one sure source of revenue. But this business model just isn’t working.
The problem, I think, can be traced to what Twitter fundamentally does NOT do. It does not solve a problem. That is the core conceit to any long-lasting product that makes a market impact. We don’t NEED Twitter. Nobody does.
What’s the Purpose?
Now, at first blush, one might argue that nobody needs Facebook Inc (NASDAQ:FB), but I’m not sure that’s true. The internet is a living, breathing universe. Just like the real world, people need a place to congregate. In the real world, it became Starbucks Corporation (NASDAQ:SBUX). That was Howard Schultz’s vision: a third place, between work and home, where people could meet.
I think Facebook has become that for the internet, and arguably, it has become necessary since no other product filled that gap. MySpace wasn’t OurSpace. It was MySpace.
Here’s the headline for TWTR news: Twitter serves no fundamental purpose. So the question is what purposes does it fulfill? For starters, it does act as some form of advertising. The problem, from my perspective, is that the ads are as invisible to me as they are on any webpage. My mind has literally figured out how to make ads invisible so I can just look at the content. So I have a hard time believing that TWTR stock has benefited much from advertisers. We can see this because advertising revenue fell in the second quarter, and I think that’s the start of a trend.
I feel almost as if advertisers are being told to spend something on Twitter just so they can tell their bosses they are spending something on Twitter, but ROI isn’t that great.
Otherwise, I don’t see much benefit. TWTR news happens when someone makes inflammatory political and news statements, and a place where people can say, “Oh! Did you hear what Useless Celebrity A said about Harvey Weinstein?” It functions as kind of a gossip rag at the grocery store checkout. The only thing missing are tweets from Big Foot.
NFL Deal is a Bust
I know a few people who have built up significant followings over the years because their tweets are funny, provocative, and/or political. They get a following in the mid-five to low-six-figures and then produce a book that they can market to their direct followers and make some money. But that is hardly a model to build a business on or a model to make Twitter a stock that makes big profits.
Twitter’s big experiment with broadcasting NFL Thursday night games is a bust, so as a content provider, it seems headed for nowhere.
The sad TWTR news seems to become clear when we look at monthly average users (MAU), as the 151 million in Q2 of 2012 has become 328 million. The problem is the growth curve is not zooming up at 20% annually. It has essentially flatlined, going from 313 million in Q2 of 2016 to 328 million, less than 5% growth.
That’s because people just don’t know what the heck to use Twitter for. Not only that, I don’t even believe those numbers are accurate.
Bottom Line on TWTR Stock
The only value I see is if Twitter can maintain positive cash flow, which it has managed in the trailing 12 months. With about $2.4 billion in net cash, the TWTR stock price — net of net cash — is about $14 per share, or about $10 billion. That’s about 17x free cash flow. Alphabet Inc (NASDAQ:GOOGL) trades at 23x; Facebook trades well over 30x.
Of course, those stocks are growing both earnings and cash flow.
I don’t see much value in TWTR stock, even for an acquirer. Unless that acquirer has a vision, getting access to consumer data on Twitter’s users seems pointless.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities.
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