Don't Hope for a Turnaround at Twitter

Latest results suggest Twitter is still struggling and will probably head lower

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Apr 27, 2016
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I recently expressed my bearish opinion on Twitter (TWTR, Financial), citing the presence of CEO Jack Dorsey as a reason to stay away or short the stock. Twitter released its quarterly result Tuesday, and my thesis played out perfectly as Twitter has lost more than 15% of its value.

After the drop, Twitter may seem attractive, but I would never encourage investors to buy into a company whose CEO I find incompetent. Hence, despite Twitter’s apparently attractive valuation, investors should continue to avoid Twitter and watch the stock from the sidelines. I am not going to recommend Twitter as long as Dorsey is at the helm; however, traders can still benefit from the stock.

Ugly quarterly report

For the first quarter, Twitter reported EPS of 15 cents, beating the consensus by 5 cents. The company’s revenue came in at $594.5 million, up 36% year over year but missing the analysts’ estimates by $13.34 million.

However, Twitter’s guidance was the main reason behind the stock’s crash as it came in way below the analysts’ expectations. Twitter is guiding for second-quarter revenue of $590 million to $610 million, well below a $677.6 million consensus. Second quarter adjusted EBITDA guidance is at $145 million to $155 million, whereas full-year adjusted EBITDA margin guidance is at 25% to 27%.

Turnaround is still not in the cards

Many investors are looking at Twitter from a potential turnaround perspective, but the quarterly results indicate the company’s turnaround is still not in the cards. Twitter’s user growth has probably peaked, and the company is finding it difficult to monetize its existing users.

The fact that Twitter’s second-quarter revenue guidance is more than 10% lower than the analysts’ estimates shows the company is still struggling, and betting on its turnaround is a risky option.

Advertising on Facebook (FB, Financial) offers a lot more value than advertising on Twitter due to the differences in both platforms. In general, users spend a lot more time on Facebook than they do on Twitter, which is why the former has been successful with ads.

The best hope for Twitter longs right now is a potential acquisition due to the crash, but buying a stock in the hope of an acquisition is not a good strategy.

Conclusion

Twitter’s turnaround is way off track, and the company will probably continue struggling as long as Dorsey is its CEO. Bad CEOs have damaged many good companies in the past. GoPro (GPRO, Financial), Yahoo! (YHOO, Financial) and SunEdison (SUNE, Financial) have struggled due to bad leadership, and Twitter is in the same category. Investors should continue to avoid the stock, and traders should watch it from the sidelines for the time being.

Disclosure: The author doesn’t have any position in the stock mentioned in the article.