Twitter Equity Dilution A Serious Risk

  • Twitter's stock based compensation expenses have exceeded $1 billion since its IPO.
  • Since Twitter's IPO, the number of outstanding shares has risen by about 74%.
  • Twitter's earnings per share dilution is a risk that investors shouldn't ignore.


Author's Note

Twitter (NYSE:TWTR) shares have flooded the markets since its high profile IPO in November 2013. The micro-blogging site which had about 362 million shares outstanding as per its first earnings release post the IPO, now has about 629 million outstanding shares.

Twitter's generously doled out stock based compensation is responsible at large, for the flood of shares post the IPO. While stock based compensation is often regarded as an innocuous non-cash expense, it does hurt investors. Outstanding shares have nearly doubled over 2014 and Twitter's earnings per share have taken a good amount of dilution.

For the purpose of illustration, in the video, we've excluded Stock Based Compensation (SBC) to arrive at Twitter's net income ex-SBC. That's because, Twitter is a loss making company, which makes it tricky to understand the impact of equity dilution.

When you divide a loss (negative number) by a larger number of shares, it gives you a smaller negative number and makes the loss per share appear smaller. That's what is termed 'anti-dilutive' and it can be a little counter intuitive. However, conversely, for profit making companies, net income divided by a larger number of shares gives you a smaller positive number.

For Twitter investors, equity dilution and subsequently EPS dilution are risks that simply can't be ignored. Clearly, investors have more to worry about than just lofty Twitter valuations. Then there's also the lack of profitability which was partly addressed in Twitter's latest earnings release, albeit insufficiently as yet. Our Twitter stock analysis video quicly summarizes why we're not very optimistic about the stock at the moment.

For those who are keen to invest in social media stocks, Facebook is a better invetsment option. While a Twitter Facebook comparison clearly highlights the difference between the two companies, our latest coverage of LinkedIn (NYSE:LNKD) shows why LinkedIn valuations are risky right now. With Facebook's growth in online video advertising, the social media giant has managed to grab a larger piece of global digital advertising spends. Armed with its 1.3 billion plus user base and improving profitability, Facebook (NASDAQ:FB), by a clear margin, is the best social media stock right now.

As for Twitter, we think Twitter valuations carry a significant downside risk at its current stock price of over $50 a share.

Video Transcript

Twitter Stock Based Compensation Expenses

Hello and welcome to this videograph about Twitter. Since its IPO in November 2013, Twitter has spent over 1 billion dollars, in stock based compensation expenses. That's a little over 70% of the revenue it has earned since then. Twitter's stock based compensation expense of 1.15 billion dollars, compares with a revenue of 1.65 billion, and net losses of just over a billion Dollars. Excluding stock based compensation expenses, Twitter could actually have been profitable, albeit marginally.

Twitter Stock Based Acquisitions

Additionally, Twitter has issued common and preferred stock worth $148 million, in connection with acquisitions since its IPO. Even though these are non cash items, they do hurt investors. Here's how.

Twitter Equity Dilution & EPS Dilution

Since Twitter's first earnings release following its IPO, owing to the increase in the number of outstanding shares, Twitter's earnings per share have seen a dilution of about 74%. For instance, in Q4 2014, excluding stock based compensation expenses, Twitter would make a net profit of about 52 million Dollars. As is evident, the increase in the number of outstanding shares, reduces an investor's earnings per share by about 74%.

Twitter Stock Based Compensation Impact On EPS

In the latest quarter, if not for stock based compensation expenses, Twitter could have reported a far more impressive EPS of 8 cents a share, as opposed to a loss of 20 cents per share. While stock based compensation is a part of life for every corporation, beyond a point it hurts investors.

So, apart from Twitter's lack of profitability and expensive valuations, investors must also watch out for equity and EPS dilution.

Thanks for watching this video. We hope you found it interesting. Do write back to us with your insights or feedback about any of our work. For more videos about your favorite stocks, always visit

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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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