"A-Well-A Everybody's Heard About The Bird." - The Trashmen signing 'Surfin' Bird' circa 1963.
The Twitter (TWTR) logo is one of the most recognized icons of the past few years. It permeates the media landscape on The Internet, and on broadcast television. Go to ESPN, Reality TV Programs, Game Shows, Talk Shows, or your local and national newscasts, and attempt to avoid it. It can't be done. It's everywhere.
Although Twitter is an integral part of contemporary culture, all that free publicity hasn't added up to a very profitable company, or, total world domination like its contemporary Facebook (FB). Facebook has over a billion Monthly Active Users while Twitter languishes at over 300 million. Why? Twitter is more difficult to use. Twitter isn't a plug-and-play application on the desktop computer, or, on your smartphone the way that Mr. Zuckerberg's products are. Quite the opposite. You must have some computer knowledge, or at least have the technological intuition to begin building a timeline on Twitter.
During the 2015 Q1 Conference Call, former CEO Dick Costolo (who still has a relationship with the company although co-founder Jack Dorsey is back at the helm as interim CEO) stated: "After five consecutive quarters of more than 97% year-over-year revenue growth, we under performed against our expectations. We anticipate the factors that affected our first quarter results will also affect our 2015 guidance.". This translates into a potentially rough six months for the company. Wall Street took notice and the stock got hammered, dropping from close to its 52 week high of $55/share to the mid $30 range where it currently trades. It got as high as $75 in late 2013.
Twitter makes most of its sales from advertising, and revenue growth decreased to 74% for the quarter. It's commonly known that there's been a big migration of advertising dollars from traditional media such as newspapers, magazines and television to the Internet. There's also the current movement from personal computers to mobile devices. Advertising budgets follow the eyeballs, and the big players in both the desktop and mobile arena are Facebook and Google (GOOG). A December 2014 eMarketer article breaks down and projects the domestic mobile advertising market to 2016.
As is presented, Twitter only maintains a three plus percent share of the American mobile marketplace through 2016. The United States is where they do the bulk of their business. However, they do have an international presence, and are working on improving the existing product. If you go by the chart, Twitter isn't picking up too much market share. During the last conference call, former CEO Costolo notes that there is a company-wide three prong approach to building the consumer base to increase those eyeballs and click throughs for the advertisers:
- Strengthen Twitter's core. (Make it easier for novice users to create timelines, and engage in activity. Easier said than done. Once you lose a customer, it is difficult to get them back.)
- Remove barriers to consumption. (Increase the monthly active users. Besides the 300 million monthly active users, an additional half billion people monthly visit Twitter, but don't utilize the service to its fullest potential.)
- Build new applications and services.(For example, the relatively new service Periscope which enables end users to create video vérité on their smartphones, and share it with the Twitter's minions.)
Bottom line is that Twitter isn't making much money, but neither are Amazon (AMZN) and Netflix (NFLX), two other companies that dominate the decade, but that hasn't stopped their shares from moving to all time highs. Twitter, on the other hand, is getting close to its all time low. Granted, all three companies have different business models, but Twitter is the one based on advertising sales. Advertising budgets are usually set on an annual basis, and those advertising dollars may not be allocated to Twitter until the end of the year.
Full disclosure, I'm one of the 300 million monthly active users on Twitter and am a big fan of the company, but not the stock because of lofty valuations. For instance, for full year 2015, the company estimates sales to be between $2.12 billion to $2.27 billion. That's with Twitter's current market cap of $24 billion. Very expensive.
Because Twitter lacks substantial earnings, you really can't value it on a P/E, or PEG basis. My personal preference for technology companies is the price-to-earnings divided by growth calculation. Not going to work for this one, which further solidifies my belief that it should never have gone public. Twitter could have raised needed capital via private equity the way that Uber and Airbnb do.
Trailing twelve month price/sales is 14.5. Ken Fisher, who developed the metric back in the early 1990's, believes it may not be as accurate a barometer as it once was, but it's still useful nonetheless when you've got nothing else to go on. Even if you double sales the next twelve months, the price/sales ratio would still be humongous based on Mr. Fisher's teachings.
Based on consensus analyst expectations, Yahoo! Finance reports better numbers going forward for Twitter. The problem with utilizing average analyst expectations, is that they vary to a great degree. It's like Donald Trump claiming he's worth 10 billion dollars, then Forbes refuting that and saying it's more like four billion. However, it's what we have to go by because it's a relatively new public company.
EPS for full year 2015 is $.34, with the lion's share coming in the December quarter. For 2016, this number almost doubles to $.67 for the full year. Impressive growth, but what if they continue to spend money for expenses at unreasonable levels, and gain market share at a snail's pace?
There's not a big short float on the stock, just 4.6%, so the Wall Street believes Twitter may be reasonably valued. Twitter's IPO price was $26, but it opened at $46 on the first day of trading. From my perspective, the investment bankers got the valuation correctly, and the stock may get back to a more reasonable level after the next conference call on July 28th.
At this juncture in time, I wouldn't pay any more than $25/share for Twitter. I'm not going to chase it, especially when we are so close to the next earnings release. Although I believe the equity should be given a premium because of its unique communications platform (it really has no peer except Facebook, and that's not an apple to apple comparison), I'm betting that it may go lower based on valuation, the nature of the advertising business, and the upheaval at the helm.