TWTR Stock: Twitter Inc May Be Running Out Of Time

Buyout Rumors Are Driving Twitter Stock

  • Keith Coleman is the 4th VP of Product since 2013. Can he do what others have failed to do?.
  • Engagement levels will only increase meaningfully on Twitter if the company can add more value by means of higher quality live events.
  • Technically the stock is under pressure to hold its 200-day moving average which is worrying.

The jury is still very much out on Twitter (NYSE:TWTR). The stock is down over 15% year to date despite reporting results that came in ahead of expectations in its recent quarter. In my opinion, the aspects keeping this stock buoyant at present are its brand, the constant rumors of an imminent buyout and the bullish future fundamentals for online advertising. The company has tried to pivot in its third quarter by announcing a restructuring plan which will result in the loss of around 350 jobs. Furthermore, the company announced that it would be building a sales channel as well as dispose of “Vine” which is a video app from which much was expected.

These measures, in essence, could be viewed as management raising the white flag. Why? Because the company seems to have caved into outside pressures (or can’t see meaningful top-line growth in the near term) and has decided to consolidate by focusing on earnings instead of growth. As earnings have been a non-event since the company went public, I had been recommending investors to focus on the company’s sales multiple which had continued to decline these past few years. Despite the company still failing to register a profit, revenue growth had been strong which was the one outlier as the share price continued to tank.

Nevertheless, over the last two-quarters, revenue growth rates have slid dramatically and this now is a major cause for concern. In the second quarter, revenue increased by about 20% to reach $602 million but the third quarter only generated $616 million which was a really disappointing number considering it was only 8.2% higher than the corresponding quarter of 2015. Therefore, despite the company’s sales multiple coming down from 68 in 2013 to 5.1 now, my interest has definitely waned due to revenue growth slowing down meaningfully in the recent quarters. Therefore for the stock to have any chance of resurrecting itself over the next few years, I believe the following issues will have to be nailed down.

New VP Of Product Has To Make His Mark Quickly At The Firm

Firstly the company has just announced that the new VP of Product will be Keith Coleman who is a former Google product manager. Twitter decided to buy his 7 man startup (Yes) in order to secure his services but Coleman may be entering a poisonous chalice here. Why? Well, Coleman will be the fourth man in the hot seat since 2013 as nobody has been able to make their mark till now. User growth remains sluggish (only 4 million added in Q3 to reach 317 million) and the platform continues to be probably the most difficult social media website to navigate. (Also Read: Don't Sell TWTR Stock, But Do Read This)

Therefore, Coleman’s principal remit will have to be to change this perception. He needs to make the experience far more appealing and one would have to wonder if he will be given enough time to achieve this. However, Coleman oversaw the creation of “Gmail” at Google which is encouraging. This e-mail service since its inception has taken huge amounts of market share from its competitors precisely because of its user-friendly make-up. Coleman has to deliver and fast.

Does Twitter Have The Balance Sheet To Compete In Live Video Over The Long Term ?

Secondly and this is probably the crux of the issue. Twitter has definitely come to the fore recently with respect to streaming live events across its platforms for both logged-in and logged-out users. The latest deal has been with Disney which is to stream new "Star Wars" content on its platform this week. The analysts are divided about the viability of Twitter's live stream services over the long term. At the moment Twitter's "Brand" seems to be definitely winning out over strong competitors. For example, Twitter successfully aired the US presidential election plus the NFL games streaming have increased engagement levels considerably.

However, as the world moves to over the top services, the question will be whether Twitter can continue to attract mass viewership. It is doing it at present because of its brand and because rights fees haven't gone to the moon for internet streaming companies. However what about in 5 to 10 years time? Engagement is a word thrown around a lot by Twitter analysts. However, this won't come unless Twitter can provide value. Yes, its interactive platform will help but competitors with stronger balance sheets are a huge threat here which is why Twitter needs to continue to work extensively on its brand. (Also Read: Why Twitter Inc's Management Changes Could Hurt TWTR Stock Investors)

The Stock Is Still precariously Close To Its 200 Day SMA

On a technical basis, the stock needs to stay above the 200-day moving average which is presently at $17.53. Otherwise, the June lows will come into play again quite quickly which would be worrying, to say the least. Many technical traders live and die by the 200-day moving average. The stock successfully recovered the average in August. If this average gets broken, many stop losses will be triggered which would only intensify the selling.

02-12-16

Summary

There are many risks to Twitter stock at present. Investors will remain uninterested if user growth remains sluggish going forward. Furthermore, because of the restructuring that will inevitably take place, growth will remain subdued. Caution is required at present here.

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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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