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Twitter - Not an Empty Vessel That Just Makes Noise

May 07, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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I live in India, a nation characterized by its ability to embrace diversity and unity, making it the largest democracy in the world. The 2014 general elections are on in the country wherein more than 1.2 billion people will vote and elect the new government. Strikingly enough, this is perhaps the first election that has seen a massive involvement of people in the form of political opinions, debates, ideologies and speeches. All this has been made possible by the birth of a new communication paradigm, i.e. social media, the growth of which has been fueled by the likes of Facebook (FB) and Twitter (TWTR). Recently though, Twitter’s share price has been declining at a constant rate. Does this continuing sell-off provide a good entry point? Let us see.

The Sell-Off Continues

The company has lost approximately half of its valuation since January when the stock was trading in the range of above $65 to the current price range of $30 to $33. The primary reason for such a decline is that Twitter is not making enough money. Metrics like tweets per day and per user mean very little if the company can't make money to justify its valuation. These numbers are just fancy till the company can actually convert them to make big money. Twitter enjoys a market cap of approximately $22 billion at current prices and still analysts find it overvalued because of its inability to fetch revenue.

Early Investors Get Rid of the Stock

As stated by this Reuters article, many early investors sold the stock in the messaging service for the first time after a six-month "lock-up" expired. As I mentioned above, the sagging usage metrics as well as the inability to show some tangible growth have concerned investors. In the first quarter, Twitter reported revenue of $250 million which represents 119% year-over-year growth. Even though the growth may seem to be impressive, this revenue number implies a trading multiple of 88x which is very expensive as compared to peers like Facebook. Also, the sequential growth was quite low at 3%, implying a stalling growth, which is a dangerous thing for a company in its infancy.

The only silver lining in the earnings call was the performance of mobile. As a percentage of revenue, mobile performed well in the quarter, with approximately 80% of total ad revenue generated from mobile devices, up from approximately 60% in the prior year. It has been made quite clear by tech pundits that mobile is going to be the growth trigger in future and the presence of Twitter in that space gives some hope of reasonable increase in performance metrics.

Versus Facebook

Since I have touched the topic of metrics, it is worthwhile to note that Twitter’s monthly active users (MAU) number stands at 57 million as compared to approximately 1.23 billion MAUs for Facebook. Monthly active user growth ticked up just 6% for Twitter on a sequential basis, while monthly active users fell 8% year over year. Even in terms of quarterly results, Facebook was miles ahead of Twitter, which was also a factor behind the sell-off in Twitter stock.

Facebook generated $2.5 billion in revenue and adjusted earnings of 34 cents per share, beating analyst estimates of $2.36 billion in revenue and 24 cents per share in profits. Additionally, the report showed that mobile ads are increasing in value for the company and actually generate almost 60% of Facebook’s total ad revenue.

Though the company declared solid results, its shares only moved slightly higher after the report — but that’s certainly better than the nearly double-digit tumble for Twitter. In addition, shares of Facebook stock got a boost after the company announced new mobile-focused features at its F8 conference in San Francisco last week.

Invest in Facebook

It is quite clear that even though Twitter might have big statistics in terms of tweets on a daily basis or a geographical basis, the company still has a reasonable way to go before generating results that can justify its current valuation. As a result, the stock is destined to face a correction in the short term and hence, Facebook represents a very sturdy choice for the time being. Facebook has picked up in the advertising space, which is testified by its second position (just behind Google) in the advertising world. Thus, it has the immense potential to bring exponential returns to your portfolio.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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