Twitter Stock Review: Should I Invest?
Updated: Mar 22, 2020
Follow Trump for best investment tips? Jokes aside, there are people who claimed to have made money off Trump's tweets.
In this post, I wanna talk about Twitter (NYSE: TWTR).
Twitter is a unique social media platform that originally allowed its users to express themselves in the form of "tweet" via a 140 characters limit. The limit has doubled to 280 characters with options to tweet animated GIFs and videos over the years. Gradually, Twitter is becoming increasingly popular even among celebrities, politicians and prominent figures.
I believe some would know of Tesla CEO, Elon Musk getting into a dispute with SEC (US Securities and Exchange Commission) over his use of Twitter which infringed regulations.
Including US President, Donald Trump whom often "shares" early outcomes of political negotiations, causing huge commotions in the market. Surprisingly, no one is doing anything about Trump's use of Twitter.
In the recent Q3 earnings result, Twitter reported to have experience bugs that affected their ads revenue. Investors were spooked, causing the stock price to plunge to a 52 week low. Now, Twitter certainly looks interesting to me.
Twitter had seen its share price dropped by almost 40%.
Increasing Free Cash Flow Y-O-Y
Free cash flow (FCF) has been increasing steadily over the past 3 years although Twitter was only registered positive net income in 2018. FCF is like your take home salary after deducting all the expenses. The remaining cash that you keep at the end of the day usually acts as a buffer for rainy days to come. The same applies for businesses.
Low debt level
Healthy debt level with current ratio at 4.69 and debt to equity ratio (D/E) at 0.25 as of 2018. Return on Equity (ROE) is 21.55% which means for every dollar we will get an additional 21 cents. With that, Twitter easily cleared my initial filtering criteria, now to look further into the business.
Twitter has a simple business model, just flash ads and hope that it is enticing enough for users to click or interact with it. From my perspective, below are some key factors to focus on as it may have significant impact on Twitter's business:
Growing Twitter user base
To increase revenue, they would have to compete with other social media sites to attract and retain users' attentions.
How is their strategy working?
Twitter had reported a 17% jump in monetizable Daily Active Users (mDAU) year-over-year. Based on the chart above, I think it's pretty clear that Twitter has been quite successful in their strategy.
Despite a growing mDAU, analysts are not pleased that Twitter consistently failed to increase Monthly Active Users (MAU), another metric used in the social networking industry. Maybe what actually ticked analysts off was the removal of MAU in reports.
Investopedia wrote an article here explaining that each social networking sites measures MAU differently. Using MAU to gauge social networks will not make a fair comparison. Personally, this MAU is almost saying hey many people look at my bak chor mee stall but not all of them buy my bak chor mee. Meaningless right?
Twitter discovered bugs affecting ads targeting, resulting in lower than expected revenue growth. CFO warned that effects of the bugs may spill over to the next quarter's revenue which I presume to be the main reason for market to react negatively.
From the chart above, it appears that the impact of product bugs was significant. (Ignore that long bar in Q2 2019, that is just a one time tax benefit.)
Well, I do think it is not all doom and gloom that Twitter is experiencing a technical problem. At least it can be fixed! The only concern is how long would it take Twitter to rectify.
Management quality and direction
This is the part where I was really surprised. Current Twitter CEO, Jack Dorsey is also heading as Square CEO. Current CFO, Ned Segal, is a Director at BeyondMeat. Two of Twitter's C level management are holding a second appointment, does this really work? Considering that they managed to turn things around for Twitter, I think there is not much to complain about.
At the moment, Twitter is looking into further improve users' experience through various of methods:
Easier for users to find topics related to their interests
Machine learning algorithm to detect and remove abusive content
Banning political ads which I think is a great move against fake news etc.
Overall, I feel Twitter is slowly moving towards a good direction by providing quality content to its current and future users.
I started using Twitter way back in 2009 but stopped in 2017. Back then, SnapChat was really popular with its unique and fresh manner of social interaction appealed to many of my peers. Lesser people used Twitter as a result, making it not worthwhile to spend time on it. Instead, I frequently use Facebook and Instagram.
Lately, I noticed that the quality of content on FB and IG has been deteriorating. My feed is full of ads that were either related to your search history which felt intrusive or about courses on making more money that sounded like scams. Without fail, FB will try to get more information out of you, prompting to sync your contacts etc. Perhaps, now is a good time for me to give Twitter another try and check out their new improvements.
In the long run, I do believe that Twitter will continue to grow slowly because of its popularity among influential people. A single tweet from any of them is equivalent to breaking news. Just imagine from a value point of view, how much attention Trump could just gather from his tweets. Then, factor in the possibility of users checking out the ads, that is how much ads revenue it could generate.
Presently, I have some of my lunch money on Twitter, assuming a possible upside of 30%. Hope I do not sound overly bullish LOL.
My 2 cents.
Disclaimer: The information listed here are strictly my personal opinion. It does not constitute as investment advice. Please do your own due diligence.