Can Jack Dorsey Manage To Revive The Twitter Stock?

  • Twitter stock has lost more than a third of its value this year.
  • Revenue growth and earnings do not justify Twitter's current valuations.
  • Twitter stock is a hold with price target of $30.

Twitter stock has been badly beaten this year and not without a reason. Twitter stock is down 37% YTD and downside pressure continues to weigh on the stock price. Twitter (NYSE:TWTR) started the year on a positive side with the stock gaining as much as 41% by the end April when the first quarter results came and then all hell broke loose.
TWTR stock chart

Source:Twitter Stock Price Data by amigobulls.com

As Alex explains in the video, Twitter's user base has been in upward trend since 2010, however the growth rate has continued to decline. A part of the decline is explained by the fact that the growth automatically slows down with increase in the user base. But Twitter's inability to grow its user base, especially if you consider Facebook (NASDAQ:FB) record in this area, has left many investors concerned.

As Alex explains in the video, Twitter's revenue growth, which has made it a darling of Wall Street, has started to decline. Twitter stock fell by 27% in April after it failed to meet its Q1 2016 revenue guidance  as well as analysts estimates. Alex is of the opinion that the current revenue growth doesn't justify Twitter's current stock price.

Twitter's earnings have been a bit volatile, however it has delivered an earnings beat in all the trailing four quarters.  And the magnitude of the beat has been huge, with the earnings surprise coming at 100% in last quarter. Twitter is expected to report an EPS of $0.12 for the current quarter, which is same as the EPS it reported in Q42014.

twitter_earnings_history_q3_2015

Source: Yahoo

While Twitter has continued to deliver earnings beat, the stock has declined massively, mainly because of its declining growth. Twitter was trading at a PS ratio (trailing twelve months) of around 23 in the first quarter as the investors expected it to continue on its growth trajectory. But the Q1 2016 earnings brought the growth expectation down to a much more realistic levels. Consequently, the stock price collapsed and valuation moderated. Twitter stock is currently trading at a PS of  7.5, which Alex thinks is still quite high. Twitter's forward PE is 42 which is very compared to the market.
TWTR stock chart

Source:Twitter Price To Sales Ratio by amigobulls.com

The questions remains why Twitter is not hasn't been successful in maintaining its users and revenue growth while Facebook has been successful? Alex feels that the main problem lies with the way Twitter delivers its feed. Twitter's stream is generally chronological as opposed to Facebook, which uses more personalized and complicated software. While Twitter currently planing to change this the result remains to be seen. Another thing which has hit Twitter's revenue is the use of ad blockers on the web. Also Twitters promotional tweets have not met with desired success. Alex argues that Twitter's product offering is bad and it need to make a substantial improvement to attract more users.

Twitter has also underwent a management change with Mr. Jack Dorsey taking over as the CEO from Dick Costolo. The management change has not brought much breathers for the stock, and Mr. Dorsey has his task cut out. Alex feels that management needs to clarify the direction in which the company is headed and make one or two smart acquisitions.

Alex has a hold rating on the Twitter stock with a price target of $30 for 2016 which is around $7 higher than the current trading price. Much needs to be done on the product front. The question is Can Jack Dorsey Revive The Twitter Stock?

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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