5 reasons Twitter is dead money in 2014
The social media service remains unprofitable, and user growth is slowing dramatically.
By Jeff Reeves, MarketWatch
Things have gone from bad to worse at Twitter (TWTR) after the social media company posted earnings after the stock market closed Tuesday.
Shares of the San Francisco-based company, which were already down over 30 percent year to date, extended the decline Wednesday morning, falling 10 percent.
Bullish investors may argue that now is the time to buy, as the shares are cheaper. Their arguments about Twitter, as far as I understand them, go something like this:
1. Insiders have no plans to sell, according to a recently filed 8-K that explicitly names CEO Richard Cosotolo and co-founders Jack Dorsey and Evan Williams as having "no current plans to sell any of their shares of Twitter common stock." That suggests insiders expect more upside in the stock.
2. Twitter indicated it has no plans to host a secondary stock offering, which would dilute shareholders.
3. Any misgivings or news that is negative for Twitter is already known -- and overdone. And now that short-sellers, who bet on a decline in a company's shares, have made their money after the stock's drop, there will inevitably be buying as only the true believers remain.
4. Revenue and profit will improve as the company better monetizes services to offset slower user growth. After all, if Facebook (FB) is boosting revenue despite little U.S. user growth, Twitter can too.
There is logic to those points.
But the reality is that there is far more weight to the other side of the trade. Because when you take a look at the cold reality of this latest earnings report, it adds up to a whole lot of reasons to sell Twitter -- not to buy it.
Here's why I am bearish on the little blue bird that couldn't:
Revenue growth is nothing special
Sure, revenue more than doubled from a year earlier. But despite boasting a market cap of $25 billion, don't fool yourself into thinking Twitter's revenue is massive. The reality is that sales doubled from a tiny $114 million last year.
In comparison, Netflix (NFLX) did over $4 billion in sales last year -- and has a smaller market value.
Besides, sales growth wasn't remarkable -- it was just what Wall Street was expecting. In fact, the $250 million in reported revenue only barely beat the median forecast of around $241 million, and forward guidance of $270 million to $280 million for the second quarter is in line with expectations of around $273 million.
Considering the pessimism surrounding Twitter, the fact that the company was on target with sales isn't a plus, so much as it is simply not yet another negative.
Twitter is still unprofitable
Despite that big sales growth, Twitter is still not making money.
Of course, you may have read that Twitter broke even on the quarter, but that's not by generally accepted accounting practices. Twitter reported a first-quarter loss of $132 million in GAAP terms, or negative 23 cents a share.
Like many ambitious tech start-ups, Twitter has been bleeding cash for a while, but it's worth noting the company lost just $27 million in the year before, meaning losses accelerated meaningfully in this earnings report.
Stock awards are costly
So what, pray tell, is the difference in math between GAAP and non-GAAP? Simple: stock awards.
In its official earnings release, Twitter said that of the $132 million shortfall for the first quarter under generally accepted accounting practices, "Twitter's GAAP net loss included $126 million of stock-based compensation expense." Furthermore: "Stock-based compensation expense is projected to be in the range of $640 million to $690 million" for the full year.
That's on total projected revenue of about $1.2 billion for the full year!
For a company that is supposedly in growth mode to be burning more than half of its total revenue in stock-related compensation expenses . . . that's absurd. And it makes you question the motivation of the executive team.
User growth is flat-lining
Twitter reported that monthly active users totaled 255 million at the end of the quarter. Not only did that fall short of forecasts for 257 million, but it also shows a deceleration in Twitter's growth rate.
Sure, the growth was 25 percent year-over-year, but in its fourth-quarter numbers, Twitter reported 30 percent user growth.
Even worse, consider that across 2011, Twitter was doubling its user base every single quarter. It's starting to look like the company is rapidly approaching a ceiling on its user base.
Internet stocks are in trouble
It's easy to pick on Twitter, but the sad reality for investors is that this company is not alone in its fight against shifting sentiment.
LinkedIn (LNKD) has cratered 30 percent this year. And despite what initially looked like a decent earnings report a few days back, Facebook is off over 15 percent from its March peak. Widening the scope beyond pure-play social stocks to all Internet businesses, Yahoo (YHOO) is down 11 percent this year, despite the Alibaba buzz. Yelp (YELP) has sunk 15 percent, and Amazon (AMZN) has crumbled 25 percent.
There's little margin of error in this space, and when you post other metrics like the ones above, Wall Street is sure to be unforgiving.
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