Could Twitter (TWTR) be an interesting investment pick over the next few weeks? Here are some initial thoughts as to why I find this stock intriguing, and a potential opportunity.
-The CEO, Jack Dorsey, is currently running two publicly traded companies and splitting his time between the two companies, in addition to sitting on the Board for Disney. Could this be affecting the stock price of TWTR? I think so.
-Twitter's stock price recently hit it's lowest price this last week. Could it keep going down for the next few months? Yes, but in the long run, I believe Jack Dorsey will either take full rein over the company, or hand it over to another qualified executive of the company.
-After reading some of their quarterly earnings filing, it appears that twitter is simply not growing as fast as investors think it should, and hence the drop of the price. The financials are slowing getting better, although they are still losing money. In the next five to seven years there is no reason Twitter cannot grow 5 to 10 times larger than it currently sits today.
-Current market capitalization is roughly $10.1B with 310 million active monthly users. On the other hand Facebook has a market cap of $341B with 1.65 Billion users. Should Facebook really be valued at more than 30 times what twitter is valued at? My thought is no it shouldn't be. While Facebook is profitable, and seems to have a business that is working tremendously for them, there is no reason that Twitter cannot do the same thing, and capitalize on its large monthly user base.
-Overall I think this could be a good investment opportunity. Could Twitter be overtaken by another company, sort of how Myspace was overtaken by Facebook and replaced? Possibly, but I believe if Dorsey steps down, or devotes his time solely to Twitter this company could grow exponentially. I believe that while Twitter is finding out what works for them in this ramp up stage, it could be shaky, however I think the Execs will figure it out.
Any thoughts or insights would be appreciated. Happy Sunday.
http://www.profitconfidential.com/stock/twitter-inc-if-jack-dorsey-does-this-twitter-stock-could-skyrocket/
http://247wallst.com/technology-3/2016/05/07/square-and-twitter-need-to-dump-ceo-dorsey/
http://www.profitconfidential.com/stock/twtr-stock-why-twitter-inc-ceo-jack-dorsey-lost-340-million/
Mark
Hi Mark - Welcome to the Capital Alligator Forum! Glad to have you here.
Let me start off by saying that Twitter is not currently in my circle of competence. While the stock has certainly come down in price, I don't know if it's currently a good investment opportunity or not. Also, I have no idea what the stock might do over the next few weeks, so I can't comment on whether or not it would be a good pick over this time period (I try to maintain a longer time horizon in my investing).
With that being said, I'm going to dig into Twitter and give you my assessment of the business. It may take a few posts to do so, but stay tuned. I'll get back to you.
Matt,
Thanks for the quick response, and promise of a future assessment of TWTR's stock price/company valuation. There is also talk that Twitter could possibly be bought out by another larger company in the near future, and have new executive team put into place, which could also improve the company valuation. Regardless, I feel that the stock has bottomed out over the last few weeks, and I plan to buy at under $15/share and hold for the long-term.
If you have any other companies you are keeping an eye on or find that could be a good potential investment, please let me know.
Thanks,
Mark P.
I wish you the best on your TWTR investment. I'll share any good potential investments with you and the rest of the forum members as I come across them.
I'm still working on my assessment of Twitter's business. In the meantime, I thought you might enjoy reading this interview with Alex Sacerdote of Whale Rock Capital.
https://www8.gsb.columbia.edu/valueinvesting/sites/valueinvesting/files/Graham%20%26%20Doddsville_Issue%2025.pdf
Alex's approach to investing in tech companies seemed really intelligent to me. Let me know what you think.
Matt,
I got a chance to read Mr. Sacerdote's interview that focused on his process and analysis of investing in Tech stocks. I found it interesting when he was talking about Management teams as a an important investment criteria that he used a comparison of Mark Zuckerberg as a good CEO vs. Twitter's top executives as a poor management team.
Thanks for sharing. It is always interesting to see how expert investors invest in their target sector, and to pick up on any investment tips.
Thanks,
Mark P.
Glad you enjoyed it.
What I like about his approach to tech investing is the 3 step filter he uses in his investment selection process: 1) S-curve of technology adoption (future growth prospects), 2) companies with competitive advantages that will benefit from this future growth, and 3) valuation. Mr. Sacerdote has been able to use this approach with great success, it seems.
I also enjoyed his discussion of the role management plays in his investment selection. I don't think the quality of management can be overstated when it comes to tech companies. Things move way to fast, and you need someone at the helm that can act quickly, decisively and intelligently.
OK, so I'm just going to start parceling out the pieces of my analysis as I complete them.
Let's start with TWTR's annual earnings (loss) per share. See graph below.
(http://capitalalligator.com/wp-content/uploads/2016/05/EPS_Graph.jpg)
As you can see, on an annual basis and using Generally Accepted Accounting Principles (GAAP), Twitter has lost money every year since 2010.
Twitter also provides non-GAAP net income/loss data. Using this non-GAAP measure of earnings, Twitter shareholders actually made money in 2014 and 2015. But the devil here is in the details. As shown below, the reconciliation between Net Loss and the Non-GAAP Net Income (Loss) added back $631 million in 2014 and $682 million in 2015 for stock-based compensation expense. Without these additions, the 2014 and 2015 numbers would have been negative as well. Furthermore, the 2013 non-GAAP net loss would have looked much worse.
(http://capitalalligator.com/wp-content/uploads/2016/05/Non-GAAP_Net_Loss_Income2.jpg)
While stock-based compensation expenses are not cash outflows for the company (and the exact amount of these expense are based on a number of assumptions), these expenses are real. Just ask existing shareholders who get diluted when new shares come online. Now, that's not to say that Twitter shouldn't issue stock-based compensation -- just that this expense is real and the company needs to obtain enough value in return to justify the expense and avoid harming existing shareholders.
A look at the quarterly numbers between March 31, 2012 and March 31, 2016 shows:
- Twitter has lost money in every quarter on a GAAP basis (quarterly losses per share range between $0.07 and $1.41), and
- Twitter lost money on a non-GAAP basis from March 31, 2012 to September 30, 2013, and made money from December 31, 2013 to March 31, 2016.
Interestingly, Twitter completed it's initial public offering in November 2013 -- and every quarter thereafter, it reported a non-GAAP net income.
Continuing on...
Twitter's growth in Quarterly Average Worldwide Monthly Active Users (MAUs) has been anemic for the last 4 quarters, as shown below.
(http://capitalalligator.com/wp-content/uploads/2016/05/Quarterly_Avg_MAU3.jpg)
(For your reference, International MAUs plus United States MAUs are equal to Worldwide MAUs.)
For the quarter ended March31, 2015, Twitter had an average of 302 million Worldwide MAUs, and for the quarter ended March 31, 2016, average Worldwide MAUs had only increased to 310 million -- a quarterly average growth rate of about 0.7%. However, for the quarters ending June 30, 2011 through March 31, 2013, every quarter except one had double digit growth in average Worldwide MAUs (and the one quarter that didn't have double digit growth had 9.4% growth). Thus, Twitter's MAU growth has slowed significantly in the last few years.
Since 2011, 72% or more of Twitter's user base has been International. For the quarter ended March 31, 2011, 72% of Twitter's quarterly average Worldwide MAUs were located Internationally and 28% were located in the United States. For the quarter ended March 31, 2016, 79% of Twitter's quarterly average Worldwide MAUs were located Internationally and 21% were located in the United States.
After examining the numbers, it becomes clear that the majority of Twitter's growth in MAUs has come from outside the United States.
Matt,
Thanks for your thoughts up to this point. Based on your analysis and research thus far what is your overall opinion on Twitter as a company and their future prospects in increasing revenues, and ultimately making profits.
Thanks,
Mark P.
Hey Mark,
No problem -- I've enjoyed looking into Twitter's business.
I'm still researching the company and formulating my opinion on Twitter's future prospects.
I can see two potential paths to profits for the company:
1) Grow Monthly Active Users (MAUs), revenues and profits.
2) Try to maintain the number of MAUs they currently have and reduce costs.
If Twitter is able to increase it's number of MAUs, that would probably be the best outcome for them. By increasing MAUs, the Twitter network would become more valuable and revenues would probably increase more than costs (due to network effects and economies of scale). This should lead to profits. However, Twitter has had a hard time increasing MAUs in the last 4 quarters and I'm not entirely sure why. Are people tired of Twitter and their offerings, or is something else going on? I don't know.
If Twitter reduces costs (for example, R&D) and tries to milk the value of its network, the network might start to shrink and lose value. However, if some of its current spending consists of growth capital expenditures (capex), then maybe some costs can be eliminated without harming the number of MAUs. I do wonder, though, what will happen to Twitter if it's not the top dog in messaging in the future.
So, here are a few questions for you:
1) Why do you think growth has slowed?
2) Do you think this slowdown is temporary? If so, why?
3) Are there any good substitutes for Twitter?
I'm interested to hear your thoughts.
Looks like TWTR shares are down today due to some analyst downgrades and comments.
http://www.marketwatch.com/story/twitters-stock-tumbles-toward-record-low-after-downbeat-analyst-comments-2016-05-24
http://blogs.barrons.com/techtraderdaily/2016/05/24/twitter-has-failed-says-moffettnathanson-no-compelling-reason-to-own-the-stock/?mod=yahoobarrons&ru=yahoo
The BBC posted this interview today with Jack Dorsey, Twitter's CEO.
http://www.bbc.com/news/technology-36376037
Matt,
I appreciate your continual feedback and analysis. Let me take a few moments to answer your questions that you posed a week or so ago.
1. and 2. I am not quite sure why the MAU growth has slowed almost to a halt. Perhaps it has to do with the fact that users feel that Twitter is not changing fast enough and adding new important features that would make the app even better. However twitter has said that they will no longer count media attachments as part of the 140 character count. Dorsey has emphasized in recent weeks that stock holders need to be patient and that the innovation will come. He has also mentioned that soon longer tweets will be allowed over the current 140 character limit. I think this is a temporary slowdown and with the general president election, and new innovations coming the MAU will increase, along with new ideas to increase revenues.
3. As of right now some analysts are suggesting that Facebook (FB) can fill the void and replace Twitter. In my personal opinion with the MAU that Twitter has and the innovation that I feel Twitter will continue to bring, I feel as though FB or any other company will not be able to overtake what twitter provides, which is a quick way to get sports, world, or political news in a matter of seconds or minutes.
I have also been doing a lot of reading about an IPO of Snapchat that is supposedly going to happen in the next year or so. In my reading they are suggesting that analysts are planning on setting a Market value of $20B when the IPO occurs. I find that odd since their revenue for last year was under $60MM. Twitter on the other had over $2B of revenue in 2015 and their current Market CAP is only $10B.
Overall I still firmly believe that twitter will double or triple their market cap within the next 3-5 years, and could happen in as soon as two. I think it will follow Facebook's trend of falling significantly after their IPO and then rebounding even stronger. Change is coming, and I think now is the time to get in while their is a large opportunity ahead of achieving significant gains.
http://www.nbcnews.com/tech/tech-news/twitter-making-changes-allow-longer-tweets-n579521
Thanks,
Mark
It took over a month of being in the $14 range, but this stock finally broke the $15 mark.
http://finance.yahoo.com/q?s=TWTR
Mark -- thanks for your thoughtful responses. And that was a nice bump in the stock price today, wasn't it? Hopefully you benefited from that.
I found your mention of Snapchat's valuation pretty interesting. I did some searching and came across this article from Fortune:
http://fortune.com/2016/05/26/snapchat-worth-20-billion/
Basically, Snapchat is still growing like crazy and the company only really tried to make money off their users in the last quarter of 2015. But the $20B valuation is still amazingly high for this company.
Yes it was definitely a nice bump today. I didn't read that they only tried to make money in the 4th QTR of last year. It will be interesting to see how everything shakes out with tech stocks such as Twitter, Facebook, and LinkedIn over the next year, and if an IPO of Snapchat occurs in the near future.
Here's an article from Bloomberg that compares the daily user numbers of Snapchat and Twitter.
http://www.bloomberg.com/news/articles/2016-06-02/snapchat-passes-twitter-in-daily-usage
Here's the backstory of the management successions at Twitter....
http://www.vanityfair.com/news/2016/06/twitter-is-betting-everything-on-jack-dorsey
It's a pretty interesting read.
This was a great read. Thanks for sharing!
Hey Mark,
As I was doing some research on TWTR, I came across a series of articles that Aswath Damodaran had written on Twitter. Mr. Damodaran is a Professor of Finance at the NYU Stern School of Business. He teaches classes in corporate finance and valuation (primarily to MBAs).
Here's his latest article on Twitter:
http://aswathdamodaran.blogspot.com/2016/02/management-matters-facebook-and-twitter.html
His most current valuation for TWTR is here:
http://www.stern.nyu.edu/~adamodar/pc/blog/TwitterFeb2016.xls
If you're interested in reading his other articles, you can go to his blog and search for Twitter.
Mr. Damodaran has some interesting thoughts about Twitter's business; and it's helpful to see what assumptions he's making in his valuation.
Twitter Invests $70 Million in SoundCloud Music Service
http://www.nytimes.com/2016/06/15/business/media/twitter-invests-70-million-in-soundcloud-music-service.html?_r=0
Yes, it has had a nice small jump over the past few days with that news as well as news that Microsoft was acquiring LinkedIn.
http://www.cnbc.com/2016/06/15/linkedin-buyout-soundcloud-investment-lift-twitter-shares.html
Well, Twitter's turned out to be a good stock pick so far.
The stock got another nice bump today after co-founder Ev Williams said that the company has to consider M&A.
http://www.bloomberg.com/news/articles/2016-08-31/twitter-jumps-after-co-founder-says-company-has-to-consider-m-a
It seems like most of the price action in the last couple of months has been due to takeover speculation. The Q2 2016 results were a slight improvement for Twitter (company still losing money on a GAAP basis, but Monthly Active Users slightly increased both domestically and internationally). However, this slight improvement doesn't justify the run up in stock price.
It will be interesting to see if Twitter gets a takeover offer. Mark P, who do you think would want to acquire Twitter?
At this point i'm not really sure. There is a lot of buzz out there that there will be a deal in place with someone before the end of the year. That gossip and talk is causing the stock to creep up even higher. It had another 20% increase so far today. As of right now it has been a good stock pick for me and I think once Twitter is sold in the next year or two I should have myself a very nice return on this investment.
Mark P.
Nice 20% jump.
According to CNBC, Twitter has "...received expressions of interest from several technology or media companies and may receive a formal bid shortly. The potential suitors include Google and Salesforce.com, among other technology companies, sources said."
http://www.cnbc.com/2016/09/23/twitter-may-receive-formal-bid-shortly-suitors-said-to-include-salesforce-and-google.html
Disney may be entering the fray as well.
http://www.bloomberg.com/news/articles/2016-09-26/disney-said-to-be-working-with-adviser-on-potential-twitter-bid
It looks like buyout bids may be received by Twitter (TWTR) as soon as this week. It looks like this stock may very well be bought out by this year or early next year.
Mark P.
Recode is reporting that Google and Disney don't plan to make bids for Twitter, and that Apple is unlikely to bid for the company. Obviously, the stock is reacting negatively today.
http://www.recode.net/2016/10/5/13179604/sources-google-will-not-make-a-twitter-bid-and-apple-also-an-unlikely-suitor
Now it looks like Salesforce.com won't make a bid either.
http://www.cnbc.com/2016/10/10/twitter-plunges-13-as-suitors-said-to-drop-off.html
Looks like Twitter's stock jumped today due to Softbank M&A chatter.
https://finance.yahoo.com/news/twitters-stock-softbank-m-chatter-212406302.html
Mark, any thoughts on the latest two executives leaving Twitter?
http://www.usatoday.com/story/tech/2016/12/20/two-more-twitter-execs-leave/95671562/