- Twitter has given investors quite a few things to cheer about this year.
- Yet, the micro blogging site does have a major few issues to sort out.
- Can Twitter Inc turn things around in 2017?
San Francisco, California-based Twitter Inc (NYSE:TWTR) has given investors quite a few things to cheer about this year. Yet, TWTR stock is down by over 22% for the year so far, even after a ~20% rally in the last six months. Beyond the reasonable success Twitter has seen in live streaming, the micro blogging site has recorded many other positives as well. From generating positive free cash flows for four quarters in a row, to job cuts (cost cutting), and voicing its focus on turning a profit in 2017, Twitter has conveyed its intent to fix its financials. That said, some niggling concerns are yet to be addressed. Can Twitter Inc turn things around in 2017? More importantly, should you bet on it? Let's find out.
First, Here's What Twitter Inc Did Right In 2016
Probably the biggest positive for Twitter Inc this year came from live streaming. Though it's too early to asses its financial impact, Twitter's efforts in the live streaming space have caught the attention of observers, competitors included. Twitter's live streaming of the US Presidential debates was arguably a success, given that more people chose to watch the debates live on Twitter, than they did on more popular platforms like Google's YouTube, and Facebook (NSDQ:FB). Not long after, Twitter was reportedly bidding for rights to a popular Asian sporting event, competing against Amazon (NSDQ:AMZN), Facebook and Walt Disney (NYSE:DIS)'s ESPN. Clearly, there's a lot of interest in this space. As for Twitter, live streaming could well be its best shot at a turnaround, assuming it doesn't get bought out.
There has been no reprieve for Twitter as far as growth is concerned. The micro-blogging platform has struggled to reignite growth, which has slipped further and further. What's worse is that there aren't any obvious triggers that could lift its growth rates higher in the coming year. If live streaming really takes off, it could potentially lift the growth trajectory. Otherwise, TWTR stock valuations could decline a fair bit, as investors will value the company as a mature-loss making corporation. Sounds bad, right? Mature, yet loss making. Not the most desirable tag for a rockstar of yesteryears.
Not surprisingly, Twitter's management has begun to focus on profits. Twitter decided to set the ball rolling by cutting its workforce by ~9%. The management also voiced its desire to curb the use of stock based compensation, which has been a huge source of GAAP expenditure since Twitter went public. In fact, you could even say that it is the one line item that has single-handedly stood between Twitter's growing pile of losses, and profitability. However, changes on this front could take much longer. We'll explain why, shortly.
Another big positive for Twitter has been its new found ability to consistently generate free cash flows. Twitter has now recorded positive free cash flows for four quarters on the trot, a fist for the micro-blogging site since it went public. With Twitter looking to ramp up its initiatives in live streaming, free cash flows become imperative. With big players like Amazon, Facebook and Disney's ESPN eyeing the space, licensing costs could get heavy. And if Twitter wants more elbow room while bidding for rights, it needs to know it can keep the engine running with funds generated internally.
Also Read: The Biggest Positive For Twitter In 2016
Last but not the least, Twitter is making attempts to clamp down on 'trolls', who some believe foiled the platform's chances of being acquired. All in all, 2016 hasn't been a very bad year for Twitter. However, there are quite a few major problems that still need to be fixed.
What's Wrong With Twitter?
Like we said earlier, one of the biggest problems for Twitter is growth, or the lack of it. And the bigger underlying problem is the inability to attract new users. And though Twitter's management tried to paint an optimistic picture by declaring year-on-year growth in Daily Active Users (DAUs), the attempt wasn't very convincing. It's encouraging to know that Twitter is doing better, compared to a bad year-ago number, but it's not enough.
At this juncture, what investors would really have appreciated is a sequential (quarter-on-quarter) improvement in this metric. Investors want to see if Twitter is progressing in comparison to the quarter ago, because investors who hold TWTR shares are probably betting on a turnaround. Even potential suitors, who might want to buy Twitter, would want to know exactly that. But the fact that such information wasn't forthcoming raises suspicions about whether Twitter is progressing on this front at all.
While Twitter wants to be profitable, the truth is that it's still making huge losses. With revenue growth slowing to a grinding halt, it appears that the only lever Twitter can use to become profitable is stock based compensation. However, Twitter just can't seem to put a lid on it. Just as it announced that it would try to curb these expenses, ex-COO Adam Bain decided to leave the company, and is now being replaced by CFO Anthony Noto. The result is an additional $12 million in stock-based compensation to compensate for the additional responsibility as COO. As if that wasn't enough, Twitter just got its third product head this year, Keith Coleman. By now, you know where this is headed.
Summing It Up
Twitter has shown a lot of promise this year, with its live streaming initiatives getting some traction. That apart, there are host of other positives, which we elaborated upon. However, there are serious problems for Twitter, ranging from growth to profitability, and the lack of control over the use of stock based compensation. Unless live streaming really takes off next year, TWTR stock could be in for a sharp correction. In spite of all its problems, TWTR stock still trades at about 5 times sales. Such a huge premium doesn't have a clear justification. Twitter has potential, but for now, the stock is best suited for deep-pocketed, risk-taking investors.
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