Twitter Stock: One Simple Fix Can Make Twitter Inc (TWTR) Profitable

  • Twitter has set its sights on turning a profit in 2017.
  • In the face of lacklustre growth, many believe this could be increasingly difficult.
  • But CEO Jack Dorsey, and Twitter's top management can make it happen, and quite easily.

San Francisco, California based Twitter Inc (NYSE:TWTR) recently announced its intent to turn a profit in 2017. For many, this new found focus on bottom line numbers has come as a relief, especially given the lack of stellar growth in the last year or so. However, many popular analysts, like Motley Fool's Adam Levy, have approached Twitter's claim with skepticism. Their primary apprehension being, the lack of robust growth, and the limited ability to cut costs without further damaging the growth trajectory. However, Twitter does have one lever, which is undisputedly controlled by the company's top management, which is why profitability is very much within grasp for the world's favorite micro-blogging platform.

Twitter's First Move - Unsustainable, But A Good Start

As part of its latest earnings release, Twitter announced its decision to cut ~9% of its workforce. Some see job cuts as a desperate move - something companies do when they can't think of a better way to cut costs. More so in this case, because Twitter is primarily doing away with sales and marketing personnel, at a time when the company is already struggling to grow. Some would argue that the move reeks of desperation, and they may well be right. However, at such times, it's better to go with the assumption that Twitter's management understands the need to reinvigorate growth. (Also Read: The Biggest Positive For Twitter In 2016)

Markets are unlikely to bother too much about earnings, given how expensive the stock is, if growth doesn't pick up. Viewed in this light, the move is a good start. It will cut costs for sure, but it's not something the company can go on doing indefinitely. Clearly, Twitter needs to do more, and reigning in on Stock-Based Compensation (SBC) expenses would be a great starting point.

Stock-Based Compensation - The Elephant In The Room

Anyone who has followed Twitter knows that the company's stock-based compensation expenses are known to be notoriously high, way higher than those recorded by peers like Facebook, and LinkedIn. In fact, these expenses are so massive that, in the context of Twitter's inability to turn a profit so far, you could even pin the blame solely on this one line item. To put things into perspective, since going public, Twitter has accumulated GAAP net losses worth $1.9 billion, which is significantly lower than the company's $2.3 billion worth of stock-based compensation expenses. And you wouldn't be wrong if you said that's unacceptable.

Twitter's management did convey its desire to bring down these expenses, in the conference call that followed its latest earnings announcement. But in the absence of robust growth, drastic cuts may be called for. For some, even the thought of a tech company based in the Valley, cutting SBC costs to the extent required may seem outlandish. However, there's another way to go about this, and Twitter's top management will need to lead from the front.

Time To Follow In Dorsey's Footsteps?

In almost every case, the biggest chunk of stock-based compensation goes to the top management, and if the management decides to forego their shares, it would most likely, easily cover the compensation due to the rest of Twitter's employees. In fact, the saving could potentially be massive, where one quarter's worth of stock-based compensation due to the top management could potentially be used for more than just that quarter, to compensate employees lower down the ranks. (Also Read: An Opportunity 10X Bigger Than The Presidential Debates)

Sounds insane? It isn't really. As a matter of fact, Twitter CEO Jack Dorsey set a precedent for Twitter's top management when he did something on those lines, not very long ago. Almost exactly a year ago, in October last year, Dorsey announced his plan to donate a third of his shares to Twitter employees. According to Forbes:

In an SEC filing in October, Dorsey explained that the shares would be added to Twitter’s employee pool to be “granted over time to Twitter’s employees and other service providers."

In the same context, this excerpt from one of Twitter's SEC filings hits the nail on the head:

"Mr. Dorsey’s share contribution is an investment in our employees and way to attract and retain them without any dilution to our stockholders."

The 6.8 million shares Dorsey planned to donate in October 2015, were worth about $200 million, which makes it a generous gesture, and an inspiring precedent. In Dorsey's own words, as he himself aptly put it:

"I'd rather have a smaller part of something big than a bigger part of something small. I'm confident we can make Twitter big!"

A move like this could massively lift investor sentiment and drive TWTR stock higher, and undoubtedly, both, Twitter's shareholders and top management could use some of that. Evaluating tech stocks? Check out Amigobulls' top technology stock picks, which have beaten the NASDAQ by over 112%.

Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

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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Comments on this article and TWTR stock

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Stock based compensation in tech is actually distributed to employees more than the people at the top. For most employees this will be 10-20% of their salary. Further it is paid out over a 4 year period. So, can actually be a huge number if taken all at once. The alternative would be paying cash or loosing employees to higher paying companies.
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Ron Deb
Myself I would hope that Disney would buy out Twitter and have ESPN team up in the live streaming of sports events it would be just the shot in the arm that ESPN needs and Twitter also. Can't beleave this has not been thrown out on the table. Disney doesn't need to purchase Netflix as this has been in the rumor mill. So hope Disney wises up and sees that ESPN & Twitter would be great with the cutting of the cable is on a major decent.
4 reply
Do share this awesome post