Tue Nov 04 2014
Live Index (1454 articles)

Beware of Twitter

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Twitter (TWTR) should change their icon to a dog, because that’s what this stock is. I wrote about TWTR a couple of months ago, and my sentiment hasn’t changed. Maybe I’m not giving the company a chance. Maybe I don’t have a big enough imagination. Maybe I just don’t understand Twitter. I’ll concede to all of these things. But, if your a shareholder in TWTR, you really need to ask yourself whether you’re better off burning your money for warmth this winter, or keep investing in stock with negative value.

I could hear the firing squad load their guns, as they get ready to attack me for talking ill of their beloved TWTR. Speculators are going to point to paper profits and price appreciation as a viable investment strategy, and how I’m a fool to think TWTR won’t become the next $ 100 billion dollar company. A great business man by the name of Sean Carter, aka Jay Z, once said “men lie, women lie, numbers don’t.” You can continue to lie to yourself, and blindly follow Wall Street’s overvaluation of terrible companies. I’d rather not.

I’ll cut straight to the point. The one thing that makes Twitter a great social media platform is the same reason its a terrible business to be invested in. Twitter makes it easy for you, me, and any business to communicate and share messages. We can follow people, build a network of contacts, and leverage that network in order to reach a larger audience. As consumers of the product, this is extraordinary. TWTR allows us to create brand messages that add value to our followers or simply promote us, leverage our network and their audience, and hopefully our message can be shared to an even greater audience. I’m not talking about having a message going viral, which is also a great for us and bad for TWTR. I’m saying the essence of TWTR, as a platform that shares messages at the click of a button, is the reason TWTR may never be profitable.

For TWTR to even be considered an investment, it needs to diversify its revenue stream. TWTR currently sells ad space to businesses. Regular users aren’t going to pay for ad space in order to build followers — we haven’t reached that level of vanity in society yet. TWTR can only rely on a large company to see value in reaching its customers on their platform. If a company wants to use Twitter in order to build its social media presence, it can do a couple of things. The short version is a company can either be strategic and organic, or it can pay Twitter to be at the forefront of a user’s feed. Both methods are toxic for TWTR. In the organic method, companies don’t pay money, they follow their own customer, customers follow back, they promote their brand using Twitter plugins, create messages that are easy to retweet, sync their social media messages on all their social platforms, and use TWTR as an extremely cost effective way to reach customers. In the payment method, businesses pay Twitter to manage their social media presence. Companies can also promote tweets, at their discretion, and have Twitter list them as a promoted user or even promote a hashtag. Companies will then pay when users click or share hashtags and tweets and follow them back. This still hurts TWTR, even though they’ve generated revenue.

Companies pay Twitter to reach a target audience the business has been unable to reach. If a person like you or me begin to follow the company, whether organically or through a paid ad, the business no longer needs to reach us. The size of the audience dwindles as the company reaches them, and TWTR’s paid services become less necessary. TWTR’s greatest asset in reaching target audiences has become the greatest hindrance to revenue growth. Regardless of whether mobile users or desktop user engagement grows, companies won’t have to pay as much to reach their target audience if their highly shareable content is spreading through the masses.

TWTR lost $ 175 million last quarter. Yes, it lost $ 175 million. Its EPS is negative $ 0.24 and its free cash flow per share is $ 0.06 for the quarter. Burning your money would be more profitable. TWTR has lost money every single quarter, but has a market cap of $ 25 billion. It has no P/E or P/FCF because you can’t mathematically calculate these ratios if the denominator is negative! The company is burning through cash with no real signs of profitability. Not only does the company have a poor financial position, it also supplements its GAAP reports with Non-GAAP reports of its financials. TWTR is such a bad company it literally needs to suspend accounting principles used by every U.S. company in order to appear profitable.

As an investor, you deserve better. Don’t keep lying to yourself. The numbers are telling to stay away from this dog. Beware of TWTR.

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