Twitter Continues to Be User Rich and Profit Poor

Twitter

Social media company Twitter continues to grow its user base considerably. They are a huge household name. The most important ingredient is left out though, the good profit part.

Twitter will be soon marking its seventh anniversary of their stock being traded publicly, and while the number seven is thought by many to be a lucky one, the way that year 7 is shaping up for Twitter, the numerology gods don’t seem to be smiling very much upon them.

Like the flash bombs that the police are using against protestors these days, Twitter makes a loud bang, and there is a bright flash of light, but their impact doesn’t amount to all that much. With flash bombs, this is intentional, where they are designed to create a spectacle but little else. Twitter has created quite a spectacle as well with their loud bangs, but little else as well.

Twitter, like a lot of companies, had a fairly long gestation period before they were ready to take their ideas to the market. They hit the scene back in 2006, and perhaps liked the number seven back then as they took seven years from their creation to their IPO. Twice that many years has passed now since they opened up their doors, so they have had lots of preparation time and enough that any excuses of their struggling because they are new have long lost their merit.

Many think Twitter is a fabulously successful platform and company, and there are few companies in the history of the world that have achieved more notoriety. It’s not even the huge level of awareness they have achieved, as people aren’t just very aware of them, it’s the fact that so many people interact with them that really has them standing out.

Everyone knows who Microsoft and Apple is for instance, who are much bigger companies than Twitter, and so many people use Microsoft or Apple products every day, but they still are not on the tip of people’s tongue every day like Twitter is. Twitter has also grown its user base very impressively over the years, and while their 166 million daily users is dwarfed by Facebook’s 1.66 billion daily users, who have 10 times as many, Twitter’s total still adds up to a lot.

Twitter takes a back seat to no one as far as the noise that they generate on a daily basis, where their combination of being a news service of sorts and a platform for social communication is a marketer’s dream. Facebook may have a lot more users and posts, but Twitter’s packs a lot bigger punch, where the public just doesn’t look to interact with just their friends and family, but the world at large, where issues large and small become grappled with.

If that’s all you knew about Twitter, the bright flash and loud bang part, you might think that this would be a great stock to own, not just good but great. On top of everything else, Twitter is considered a tech stock, which is where the real action is with stocks. Their being such a successful tech company on the face of it should have us rushing to buy it if we didn’t know any better, and a lot of people don’t.

If it were true that people were falling over themselves to own this stock, the story would be a much better one for Twitter than it is, but while a lot of amateurs who select their stocks based upon such superficial considerations as awareness, those who really move the markets have been noticeably absent, and this is actually a pretty terrible stock if we bother to look beyond the snake skin that covers it.

Twitter’s apparent success is only skin deep as it turns out, relatively speaking that is, and in year 7, more than relatively speaking as they are actually expected to book a loss this year. While people are eager to blame the lockdown for this, which has definitely turned down advertising revenue in its midst, it hasn’t bothered Facebook, who are still doing fabulously.

The lockdown has served as a Darwinian influence on business, and especially social media companies like Twitter. This bully has come along and beaten up the weak kids on the block, and Twitter is definitely one of them, where Facebook’s much greater strength has allowed them to fend off this opponent easily.

When it comes to comparing stocks, how much money one company makes over another actually only serves as noise, which serves to just distract those who aren’t very informed about these things and think that company performance and stock prices are the same thing. This is a lot like looking at a dog’s tail and thinking you are looking at the dog itself, as if we own a stock, the stock’s performance is the only thing that matters and everything else is noise.

When both your stock and your company performance are pointed in the wrong direction though, this is noteworthy, although the company performance part mostly serves as a distraction. We also widely make the mistake of seeing stocks in isolation, where we may think that one stock is doing fine enough without realizing that we and the market itself may do better with another, and the relative lack of performance of a stock is more than enough reason in itself to not be in it.

The notable lack of relative performance of Twitter’s stock is nothing new, and extends well beyond their current struggles, and goes right back to the birth of this stock, when it debuted as an IPO in 2013 at $45.10 per share. It hit the ground running, and a lot of excitement was generated in the first month of its stock’s life, where it ran up to $74.73, but that was the last time that this stock has been exciting.

Investors may have thought that they were buying the next big thing, or a stock that is destined to achieve the meteoric rise that we sometimes see with stocks like this, but they were headed for a big disappointment.

Twitter’s IPO Has Had Almost 7 Years to Prove Itself, and Failed

Looking at where the stock is trading at 6 ½ years later, it hasn’t gone beyond the $74 per share initial runup, or even been able to hold their $45 initial trading price either. They were back at $45 last September, but they hit the wall again, and didn’t need any coronavirus to send them reeling, they were able to do that all by themselves.

By the time November hit, two months later, Twitter stock had fallen all the way to $29, in spite of all these new users that they are adding every month. The steady impressive rise in their userbase over all this time has not seen its way to the stock price, as stock prices are about so many other things besides this.

In spite of the effects of the 2020 lockdown, Twitter’s stock is actually trading higher than it did last November, at $34.87 as of the close on Friday, and is actually in the positive for the year. Their problem is far from the transient one that so many other stocks have suffered, as Twitter’s runs much deeper than this and has been much more persistent and virulent.

You can’t speak of a stock in isolation though, and the first comparison that comes to mind is with their much bigger brother Facebook. Twitter is down 23%, not this year, since the stock started trading back in 2013, and given how much stocks have grown in general since, this doesn’t just qualify them as an underperformer, it shows that this stock is rotten to the core.

Facebook, on the other hand, is up 353% during the time that Twitter lost this 23%. We are not comparing similar stocks here, we are comparing stocks on the opposite end of the spectrum, where Facebook has been incredibly good and Twitter has been incredibly bad.

We can look at this comparison on any time frame we wish, and Twitter comes out ugly. Over the last 2 years for instance, Facebook is up 22%, while Twitter has lost 16%. Facebook hasn’t even done that well over this time, and you could have earned considerably by just owning an index fund that tracks the Nasdaq 100, which is up 34% over the last 2 years and has just made another all-time high.

The Nasdaq hasn’t done quite as well as Facebook has since Twitter’s IPO in 2013, but the 294% that the Nasdaq has gained dwarfs Twitter’s loss of 23% almost as much as Facebook has. We don’t really want to put all of our money in one stock though, but you certainly could put it all in this index, and we shouldn’t want to put any in a horrible stock like Twitter.

While we could describe the terrible underperformance of Twitter’s stock just by telling you that the market simply does not like it, and that’s as deep as we ever need to go with these things because that’s the actual verdict itself. It is the verdict that matters, what actually happened and what is continuing to happen, and why it happened doesn’t even matter.

However, the problem with Twitter from a business perspective is that users tend to scroll through the tidbits that Twitter provides on their site, their tweets as they call them, where the advertisements that they rely to make money on go past users like a blur, and considerably more blurry than other sites offering online content.

More Users Does Not Mean More Success for a Stock

Twitter may be adding users, but their revenue per user is going the wrong way, and the trend is for users to scroll faster and faster and leaving the crucial ads less and less viewable and less and less clicked. Twitter’s content may be plenty engaging for many, but the more engaging the content is, the less engaging the advertising becomes, which gets lost in the background more.

While it might seem crazy that Twitter has just picked a fist fight with the President, determining that Trump’s concern with mail in voting is false information just because they don’t agree with it, or claiming that he is inciting racial violence by expressing his desire to better control the rioting that has gripped our nation lately, this may not be entirely explainable by their just acting stupidly, this may actually be a desperate act to attract more attention to themselves.

There is no question that they have been very successful in doing that by trying to censor Trump, but what they may not realize is that Trump has a great number of supporters, and like with politics, you should not be trying to punch people in the face that you should instead be coveting.

Twitter doesn’t need the extra publicity from this, and this may do more harm to them than they may believe, perhaps being immersed too much in a world where Trump is the Devil and everyone hates him, and even thinking that they have scored a win here.

Twitter really doesn’t need to worry too much about the government breaking them up like some of the big tech companies do, including Facebook, but they are already pretty broken now and can ill afford any negativity. Whether or not this ends up hurting them, they are simply not in a good place now and are not headed toward a good place either.

Twitter is now considering slowing down their scroll rate to make their ads more prominent, which surely is an act of desperation as they risk isolating their users with this, and any “progress” that they make here will only serve to frustrate the people that that butter their bread. It is not that such a thing isn’t worth trying, but it likely won’t be that effective and will come with its downside as well.

Meanwhile, the stock continues to languish, with no real end in sight. Twitter is not so weak that we would want to short them, but being long this stock now or at any time in their history other than the opportunity to make a very quick buck in their first month of life, an opportunity long gone, is simply short on good judgement.

Robert

Editor, MarketReview.com

Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.

Contact Robert: robert@marketreview.com

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