Should You Use This Rally To Exit Twitter Inc (TWTR) Stock?

Suddenly, some folks seem to love TWTR stock. Is this a comeback? Or just a dead cat bounce?

Should you use this rally to exit Twitter Inc - TWTR stock
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Shares of San Francisco, California-based Twitter Inc (NYSE:TWTR) seem to have made a comeback, but should you stay invested? Buoyed, at least in part, by Jack Dorsey's move to buy shares of the company, TWTR stock has gained by close to 7.4% over the last 3 days. And this rather unexpected surge seems to shifted the momentum for the stock, which crashed following Twitter's Q4 earnings release, about a week ago. The development has also caught the attention of some big names, like TheStreet's Jim Cramer, who has called the Dorsey's move a positive sign for the languishing social media platform. What's more, Cramer is not alone. There's also The Motley Fool's Rick Munarriz, who recently put his weight behind Twitter, listing out 3 reasons why he bought the stock. We'll look at all of these new developments in greater detail to understand how they could impact TWTR, and how investors could play the stock going forward.

First, the good part about TWTR stock.

It always inspires confidence when a company's top management buys shares of the company, and not surprisingly, Jack Dorsey's move to buy shares of Twitter seems to have done the same. Dorsey's move to buy shares seems to have served as en endorsement of the company's future prospects, lifting the sentiment around the stock. For shareholders, it's a welcome move, especially after the near 17% collapse in Twitter's share price following its most recent earnings announcement on the 9th of Feb. Now, there are a couple of positives that deserve a mention, including Munarriz's 3 reasons why he bought TWTR stock.

For starters, you can't but appreciate two perceivable improvements in Twitter's financial performance, the reduction in stock based compensation, and the sharp rise in cash flows. Twitter's Q4 earnings release showed a drop in stock based compensation. However, at $138 million, Twitter's dole out is still massive. Investors will be hoping that the number shrinks further and faster. As for cash flows, Twitter has done a fair job, and it now seems increasingly likely that Twitter will be able to sustain itself financially without too much trouble. Twitter doubled its operating cash flows for the year (FY 2016) and expanded its free cash flows ~10X, to touch $444 million.

Should you care about the DAU growth on Twitter?

Munarriz mentions Twitter's Daily Active User (DAU) growth as the first reason why he bought shares of the company. While he may not be entirely wrong on that front, the problem is, we don't really know if DAUs have increased meaningfully. So far, Twitter has only broken out YoY growth numbers. But that doesn't actually tell us the absolute DAU base. And neither does it tell us if DAUs have improved sequentially. So, the fact that YoY growth in DAUs has improved could potentially be a result of a drop in DAUs last year, whereby the YoY growth rates look like they're improving this year.

If Twitter really wants to inspire confidence, they might have to disclose the sequential movements in DAUs. However, the company's management hasn't been very forthcoming with respect to those numbers. In fact, when asked during the previous earnings call, Twitter CFO Anthony Noto declined to disclose the number:

"As we think about DAUs and the other metrics that you mentioned, we re-evaluate what metrics we're going to share with you from a disclosure standpoint at the end of each year. We've obviously moved down the path of reporting more than just MAUs. We're now providing you with DAU growth as well as a growth trend in our engagement metrics. We think the growth rates are the thing that we're most comfortable with sharing at this time, and we're going to stick with that."

To sum up, you probably shouldn't read too much into the 'improvement' in Twitter's DAU base. Since Twitter's management is happy with the development, we'll assume that it's actually improving. But until we can really measure than in absolute or sequential terms, we probably won't jump onto the bulls' bandwagon.

M&A buzz and optimism around new products that could drive growth.

The other reasons Munarriz has mentioned as part of his rationale are the assumption that "buyout buzz will never die", and his assessment that the "the revenue slump is temporary". As Jim Cramer, like many others, has pointed out, Dorsey's move to buy shares of Twitter somehow lead you to believe that a buyout may not be on the cards for now. Cramer chose to say "Now you know there can't be a takeover". That's probably true, but since we don't really know, we won't speculate.

Coming to second part, Munarriz believes that Twitter's revenue slump is temporary. He opines that Twitter is now closer to the floor than the ceiling, and that new products and ad formats will drive growth in the coming year. Munarriz could right - nothing's impossible, and Twitter just saw 5.1 million people tune into the Grammy Awards, which is higher than NFL live streaming viewership. Undoubtedly, live streaming holds some promise for Twitter. However, when you look at some of the other metrics, you can't help but wonder if that alone can really lift top line growth.

Twitter registered it's first YoY decline in ad revenue in Q4 last year. And that's in spite of the fact that ad-engagement grew by a whopping 150%+ YoY. So, it's quite evident that what lies ahead is a rather steep uphill task. With ad-prices falling consistently every quarter, by 56%, 64%, 44% and 60% YoY in each quarter this year, turning its ad revenue around seems like a mammoth task, even for the company's live streaming business, which is where the hope really lies right now.

Summing it up - The recent rally is an opportunity to exit the stock.

Jack Dorsey's move to buy Twitter shares is a positive for sure. However, that doesn't really ensure that Twitter can turn things around financially. While the company's ability to generate operating and free cash flows has improved drastically, a look at revenue related metrics suggests that a turnaround could be tougher to execute than it seems. As it appears, it's likely that Twitter will be able to sustain itself financially. However, there's not enough evidence to suggest that the company can shake its way out of the stagnation it has reached. The only near term catalyst seems to be the upcoming Snapchat IPO, which could lift valuations for Twitter and Facebook if Snap Inc does manage to go public at a valuation of $25 billion. Risk averse investors would do well to use this rally as an opportunity to exit TWTR 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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