I recently wrote about Facebook Inc. (FB, Financial) and whether it could be considered a value stock. I had been seeing it mentioned elsewhere in that manner, so I had to see for myself. This week, I am looking at Twitter Inc. (TWTR, Financial) through a similar lens.
Twitter has been around for long enough that it can no longer be considered the latest, greatest internet innovation. It took me a while to figure out how to use Twitter for my business, but I think I have and I think it will be around for quite a bit longer.
I look at Twitter as a kind of electronic bulletin board, the kind you would see in the lobby of a college dormitory or office building. I am talking about the old-school kind of bulletin board with homemade ads posted that have little strips at the bottom for you to tear off the phone number. These are sheets of paper thumb-tacked to corkboard advertising things like “Help Wanted,” “Car for Sale” or “Apartment Available.”
I publicize my writing, both finance and fiction, on Twitter. And I search for things, things like news and people and companies to network with, by typing the subject in the search window along with the obligatory hashtag. After I hit enter, Twitter provides me with a list of posts pertaining to my search topic. It works.
Twitter’s stock did quite well last year, clocking in an approximate 37% gain. It also increased the character allowance for tweets, the messages you create and share with your followers, from 140 characters to 280. This was a controversial move with some die-hard Twitter acolytes, but in my opinion, the increased character limit might increase the number of users, which, if it does, should add to the bottom line. While some tweeters liked the very restrictive 140-character limit, doubling the amount will enable those frustrated by the prior limitation to better share their message with Twitter’s massive audience and, therefore, also spend more time on the social media platform. But I do not see Twitter as a value play. I think it’s a good company and the stock has some upside potential, but that is dependent on growth more than anything else.
Twitter does have some quality numbers, including current ratio and free cash flow. And many analysts are predicting the stock price will rise, some think as high as $27 in 2018, which would give shareholders a 12.5% gain this year. But it might not.
In October, Twitter reported third-quarter revenues of $590 million on adjusted earnings per share of 10 cents, which bested analysts’ expectations of seven cents on revenues of $586.73 million. Daily active users (DAU) were up 14% over the prior year while total monthly active users (MAU) for the third quarter were 330 million, up 4 million from the prior quarter and an increase of 4% year over year. Domestic MAUs grew 1 million sequentially to 69 million while international MAUs grew 3 million to 261 million.
And that was good, quite good, but good rarely comes unaccompanied by bad. Twitter also reported that “since the fourth quarter of 2014 we had included users of certain third-party applications as Twitter MAUs that should not have been considered MAUs. These third-party applications used Digits, a software development kit of our now-divested Fabric platform, that allowed third-party applications to send authentication messages via SMS through our systems, which did not relate to activity on the Twitter platform.”
Additionally, third-quarter revenues were lower than the year prior. In 2016, the company reported earnings per share of nine cents on revenues of $615.93 million versus this year’s $590 million with adjusted earnings per share of 10 cents.
Twitter is expected to report earnings on Feb. 8 and the company and some analysts expect the quarter to be a good one. That’s great. I hope it is, but Twitter is still not a value stock. I would not necessarily tell anyone not to own it or not to buy it here, but I would tell investors to do so knowing what they are getting, and to do so without the word “value” in mind. Benefiting from Twitter ownership, for the immediate future anyway, will be from share price appreciation. Since Twitter was up big last year, it needs to keep surprising to the upside in order to deliver results like 2017 again.
There is downside risk for shareholders. If it misses on earnings or fares poorly in the press and in the courtroom (Twitter is dealing with some legal issues stemming from former employees and allegations of discrimination and the proliferation of fake news on the app), the stock could give up some of 2017’s gains and provide latecomers with capital losses.
If the stock paid a dividend, there would be something to offset the inherent risk that would help investors ride out the downside if it comes. But there is not a dividend. Therefore, buying the stock now, or keeping it if you already own it, is a statement that you expect continued share price appreciation.
If you know Twitter, you like it and you agree with analysts who think the stock will be up double digits this year like it was last year, go for it. But don’t buy it thinking this is a value play. It is not. If you want true value from Twitter, you might want to search for "#valuestocks" on Twitter (and here at GuruFocus) to find companies that really are value investments.
Disclosure: The author owns none of the stocks mentioned in this article.Ă‚
