The optimism toward Twitter Inc (NYSE:TWTR) continues unabated. TWTR stock is looking to break $20 for the first time since a supposed sales process fell through in early October. After that news, Twitter stock fell from $25 to $18 in a matter of days. It would bottom at $14 in April.
Yet Twitter stock has rallied — again. A Q1 earnings report seemed to please investors, though both I and fellow InvestorPlace contributor Larry Meyers thought it was an ugly quarter. And lately a series of live video streaming deals seem to have sparked further optimism toward TWTR stock.
On that front, I’m highly skeptical. Twitter’s role in the video ecosystem seems limited to either niche content and/or deals with entities not big or popular enough to draw attention from larger players. And with the current Twitter stock price valuing the business (before cash) at roughly $12 billion, the idea that streaming video can support anything close to $20 for the stock seems something close to foolish.
TWTR Stock: Video Isn’t Working So Far
Twitter CEO Jack Dorsey (in his spare time when not also being the CEO of Square Inc (NYSE:SQ)) and other executives have talked up the importance of video for the company going forward. On the Q1 conference call, COO Anthony Noto cited 800 hours of live streaming programming in Q1, with 45 million unique viewers.
That sounds impressive. But looking at the fundamentals, there’s a real question as to what exactly that video is doing for Twitter revenue and profits. In Q1, revenue declined 8%, including an 11% drop in advertising. Video engagements increased — in fact total engagements better than doubled. But prices plummeted: Twitter’s cost per engagement dropped some 63% year-over-year.
In other words, TWTR’s video strategy is driving more ad engagements, but those engagements are much lower-quality, and much lower-priced. And with legacy advertising, both Promoted Tweets and direct response, declining sharply, Twitter’s revenue now depends on its video strategy.
But that strategy, even if it grows usage, has a significant margin problem. Lower prices are one factor. The cost of licensing content is another. Twitter’s EBITDA margins did improve slightly in Q1, due to lower-than-expected expenses. But Q2 guidance shows the impact of video. Adjusted EBITDA is guided to $95-$115 million — down 40% year-over-year at the midpoint. And that’s with video usage continuing to increase.
Long story short, video hasn’t been the answer so far.
TWTR Video Isn’t the Answer in the Future, Either
To understand Twitter’s ‘true’ profitability, stock-based compensation is guided to $115-$125 million for the quarter. That figure, of course, is excluded from Adjusted EBITDA. So is nearly $20 million in interest expense, and capital expenditures that are expected to average almost $90 million a quarter.
This is a business that by any real measure is burning cash. And expecting video to reverse that — and drive Twitter stock higher — is asking too much.
Aside from the margin problems, there are strategic questions here. Twitter still is competing for ad dollars with Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). Those two companies generated 99% of online advertising growth in the U.S. last year. TWTR stock bulls talked up a non-exclusive deal with the NFL last year, but Amazon.com, Inc. (NASDAQ:AMZN) took it away for the 2017 season.
That competition doesn’t even include legacy media companies like CBS Corporation (NYSE:CBS) and Comcast Corporation (NASDAQ:CMCSA), through its NBCUniversal unit, Walt Disney Co (NYSE:DIS) unit ESPN, or streaming companies like Hulu.
The idea that Twitter is simply going to enter the hugely competitive media landscape and create billions of dollars in value almost defies belief. Again, this is a company valued at roughly $12 billion. Viacom, Inc. (NYSE:VIA, NYSE:VIAB), one of the most respected media companies in the world, is valued at only twice that (on an enterprise basis).
And it’s not as if Twitter’s content is that unique — or all that interesting. A partnership with Bloomberg has promise, admittedly. But non-exclusive rights to major sports, second-tier college sports (like those streamed through its Pac-12 deal), and music coverage isn’t exactly a revolutionary business model. That content simply isn’t enough to support the current valuation of Twitter stock — or anything close.
Avoid Twitter Stock, Or Sell It
Meanwhile, M&A is unlikely, the company is burning cash and monetization of its legacy platform continues to be a struggle. It’s a tough combination for TWTR stock. And it’s a combination that should lead the stock down, once the current optimism subsides.
As of this writing, Vince Martin has no positions in any securities mentioned.
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