The Dangers Of Shorting Twitter Stock Now

  • Twitter's ad revenue share is predicted to increase significantly over the next 12 months. Expect revenue growth to continue.
  • Lack of user growth will not deter more advertisers to use its platform. Its new "Audience Platform" initiative will provide further reach for its adds to millions of more apps.
  • This company has the revenue growth but high R&D cost is hampering profitability. If R&D could decrease and revenue could rise, this company could definitely start to report operating profits.

Twitter (NYSE:TWTR) stock has been getting hammered recently but its decline has definitely been aided by the drop in the S&P 500 (INDEX:SPAL),  which is trading precariously around the 1,900 level. I had warned the traders and investors in August that the main indices in the US underwent a technical damage and that I only saw lower prices at least until October. The twitter stock meltdown has attracted short sellers in mass with short interest increasing substantially. However I can only see the market declining temporarily here because the FED will not allow markets to come down substantially. What investors need to remember is that we don't have free markets any more. Central bank interventions had and will continue to prop up markets all over the world in an attempt to fight off deflation. This is why Twitter stock might fall in the short term but it will be rescued if equity markets continue to slide. Then I expect a huge rally in Twitter as the shorts get covered plus I believe the company could beat on earnings next month for a number of reasons
TWTR stock chart

Twitter Stock Price Data by amigobulls.com

Twitter Ad Revenue Set Grow Faster Than Facebook's

It's common knowledge that the main reason Twitter stock tanked after Q2 earnings was the poor increase in its monthly active users. However its revenue spiked to over $500 million for the quarter which was a 60%+ increase year on year. I acknowledge that twitter bears will state that this company has yet to turn a profit but revenues has to be the starting point and this company, despite all the bad press, is still one of the fastest tech companies out there in terms of revenue growth. Furthermore its ad revenue share is set to increase significantly (growing even faster than Facebook) in the next few years (at Google's expense) which will line the coffers even more going forward. (see chart)
twitter1

We will see next quarter if the efforts the company has been making recently will have increased user numbers and engagement meaningfully. Twitter hopes that its "Highlights for Google" program, the new recap feature and the overhaul of its homepage will make more users "stick" on its platform which will ultimately increase revenues.

Traffic To Twitter Platform Will Grow

Another bone of contention that twitter bears have is the lack of real-estate the company has to sell its ads. It stands to reason that if the company's MAU metric is slowing considerably, advertising revenue should also slow. This is where there is a big disjoint between Twitter bears and bulls. Twitter's CFO came out recently and said that Twitter was bigger than Facebook when you compare raw traffic to the website. This may very well be true as Facebook users must be logged into the platform in order to use the platform. Not so with Twitter and with new initiatives (such as Project Lightning) about to come on stream, visitors will be able to tune into live events without being logged in. Larger traffic numbers to the platform will undoubtedly lead to more revenue for the company going forward. This is where the disjoint emerges when comparing social media companies such as Twitter and Facebook. Furthermore if Twitter keeps on reporting higher revenue growth than its peers (even with lower user growth), then Wall street will have to rethink on how it values this company.

Audience Platform

Other metrics such as traffic growth or advertiser growth may be better options for valuing this company going forward. For example on its mobile network, recently the company launched "Audience Platform" which will enable the company extend its advertising campaigns from its main platform (website or app) to millions of other mobile apps. Furthermore its new video ad-features is expected to reach out to 700 million users which is just under 400 million more than its current user base. All these collaborations will definitely raise advertising revenues and grow the current number of advertisers (100,000+) using the platform. Watch the revenue count in the next few quarters. If the share price stagnates or even drops even though revenue growth continues to be strong, continuing shorting of this company would be risky in my view

Twitter Relative Valuation

While we can't compare this company on earnings with other tech stocks, we definitely can compare it on a revenue per share basis. Twitter's current revenue per share is $2.8 while Facebook's for example is $5.4. On the surface, Facebook may look like a better bet here in terms of value as the investor is receiving $5.40 in revenue for every share he or she holds. However because of the recent slide in twitter's stock, Facebook is now trading at almost 4 times Twitter's share price which illustrates that on a revenue basis, the investor receives more than Facebook when compared on similar dollar amounts invested.

Twitter Stock Could Witness An Explosive Rally

Furthermore when you look at the company's recent income statement, almost $200 million was reported as R&D. This seems very high when you consider that revenues came in at $502 million and gross profit at $334 million. In my opinion this huge R&D figure is the reason for the company continuing to report an operating income loss every quarter. A new CEO who should be announced soon could easily reduce this huge expense in a heartbeat in order to steer the company towards growth. This company has the revenue and in one way should be applauded for sacrificing current profits in order to maximize the future potential profits of the company. Nevertheless shareholders are becoming increasingly impatient and I see the company becoming more streamlined in the near future in an effort to retain shareholder capital. The more the short interest continues to rise, the more explosive the rally could be when the shorts get covered. The company announces earnings for Q3 on the 26th of October.

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Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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Comments on this article and TWTR stock

stocksman
bearish
Twitter is way overpriced. It will definitely fall in the short term as author is predicting. However it may never rise and will get acquired for cheap. They are not able to even find a CEO right now, so forget any turnaround here.
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