Twitter Inc. stock is down nearly 10% in the Year-To-Date. However, TWTR stock could be headed even lower. Here is why.
Twitter's life as a publicly listed company has been short, and bitter for the major part. The San Fransisco, California-based micro-blogging company listed at a market cap of nearly $25B, which was called expensive at the time of the IPO. Twitter Inc. (NYSE:TWTR) immediately proved the naysayers wrong, gaining 60% in just 2 months following the IPO. However, the $39.3B valuation was the peak and the ride thereafter has pretty much been downhill. The Micro-blogging platform is today valued at a market cap of $10.6B, down 58% from its listing valuation and 73% from the post-IPO peak. That's been Twitter's story, and it isn't going to get better anytime soon. The future for TWTR stock looks just as bleak as the past, if not worse. Here is why we would be wary of buying into the micro-blogging platform even at these seemingly 'cheap' or 'beaten-down' prices.
The company has delivered little to justify valuations.
At the time of its listing, Twitter was valued at a whopping 44.8x its trailing twelve month (TTM) revenue of $534.5M, and the company has achieved little to justify those lofty valuations. Yes, the company has managed to grow its top line at a rate of 56% YoY, but that growth hasn't dripped down to the bottom line. (Also, growth in recent quarters has dropped to single digits, which is worrisome.) Twitter continues to bleed money, with the company having reported a net loss of $456.9M in FY 2016. Not surprisingly, the TWTR PS ratio has dropped to sub-5 levels, with Twitter stock currently quoting at 4.14x its TTM sales. However, it is hard to justify even these valuations, given Twitter's bleeding bottom line. The only time Twitter valuations look attractive is when you compare against Snapchat. And well, this isn't saying much, given that Snapchat enjoys insane valuations which are far from sustainable. All in all, topline growth is the biggest positive Twitter has delivered in the three years since its IPO. Is that good enough? Well, not good enough to justify the lofty valuations.
The emergence of the biggest competitor.
The fundamentals of Twitter are just one-half of the story. And, while the micro-blogging platform has been taking steps to rectify the sorry state of the fundamentals, the story could have gotten just a bit more scary on another front: competition. In fact, the emergence of a new competitor could bring into question Twitter's status as the number one micro-blogging network. Yes, you read that right. As per various news sources, Mastodon, a relatively new micro-blogging platform founded by 24-year-old Eugen Rochko, is the latest challenger to Twitter's 'cult status' among micro-bloggers. And, people are starting to take notice. According to Jack Morse from Mashable, Mastodon is "an underdog with serious spunk." Comparing the two networks, Morse writes that the increasingly popular social network delivers a Twitter-equivalent micro-blogging experience, but with better privacy controls.
Given the fact that Rochko doesn't have investors, or a board, sitting on his head, the pressure to monetize the platform is limited. And, this isn't going to change anytime soon. As per the Mastodon Github page, Rochko writes "I am not interested in VC funding, monetizing, advertising, or anything of that sort" which means that the Mastodon platform will be focussed on delivering a rich micro-blogging experience, which allows 500 characters per post, without compromising the user experience with infringing/irritating ads. At least, for the time being. In fact, such has been the rush to get onto Mastodon that Rochko was forced to shut registrations temporarily. And brands are noticing. According to Mashable's Morse, Brands are moving with, frankly, impressive speed to capitalize on what may very well become the next big"thing." Well, Twitter might truly have bumped into its biggest competitor/threat yet, and unfortunately, not at the best of times. The company is struggling to sustain its growth momentum, with user growth stagnating. The emergence of Mastodon could hurt Twitter's growth even more, and the Twitter investment thesis might have just gotten a bit more scary.
Twitter Technicals Indicate A Downtrend
The evaluation of Twitter's fundamentals and competitive threats leaves little room for a bullish TWTR theory. A look at the Twitter technical charts just strengthens the bearish view. TWTR stock price has been in a long-term downtrend ever since its Post-IPO high, and the short term trend isn't encouraging either.
A quick look at the Twitter technical charts indicates that the long term and short term trends are clearly downward sloping. TWTR stock faces resistance at the 14.89 and 15.82 levels and, which indicate lower highs on the TWTR weekly chart. On the lower side, Twitter stock has a crucial support at the $14.54 level, which was the close on March 21. A fall below this level could take Twitter to all-time lows, with no meaningful support til the $13.73 level, which has been the lowest point at which Twitter stock has changed hands. Hence, investors looking to enter into TWTR stock should do so only on a breakout above $14.89 level, which should also be accompanied by strong volume. More risk-averse investors can wait for a breakout over the $15.82 levels.
Adding to the bearish theme, Twitter stock is currently trading below its key 20-day and 50-day moving averages. The stock has also formed a descending triangle pattern over the last few months. A breakout below the support at $14.54 will indicate a 'continuation' of the current downtrend in the stock. The lack of a fundamental strength, the worsening of the competitive landscape and bearish technicals indicate that investors should avoid TWTR stock for now.
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