5 reasons to dump your Twitter shares

The company is struggling to make a profit and is overvalued, and disappointing trends will continue to weigh on the stock.

By MSN Money Partner Jul 25, 2014 1:02PM
Caption: The headquarters of Twitter, Inc in San Francisco
Credit: © Kim Kulish/CorbisBy Jeff Reeves, MarketWatch

Recently, in a column about five stocks that are struggling despite strong brands, I mentioned that I am believer in Twitter (TWTR) as an information filter but not as an investment.

A number of readers challenged me on this. And while I tried to respond via comments on MarketWatch -- and of course, on Twitter itself -- I felt the topic was worth further discussion as we approach a crucial earnings report for Twitter.

My bottom line is this: Twitter is struggling to make a profit and is overvalued, and disappointing trends in both user growth and user engagement will continue to weigh on the stock.

Sure, there's always a chance that this trend changes three or five years from now. And sure, you can fall back on hopes for a white knight to buy Twitter at a big premium.

But the risks are too large to hang on to Twitter in the hopes of either occurrence.

Here's why you should sell your Twitter stock well in advance of the company's July 29 earnings report:

1. Twitter has no profits

In its first-quarter report, Twitter posted another quarterly loss, this one totaling $132 million, or about 23 cents a share. This is part of a long trend of losses, and the company is barely projected to break even for the rest of this year. Furthermore, many analysts have the company posting only single-digit EPS numbers in 2015 -- including a meager forecast of just 6 cents per share in earnings for all fiscal 2015 from the folks at Standard & Poor's.

2. Twitter is overvalued on its non-existent profits

I don't mind too much the forward price-to-earnings ratio of about 16 for the Standard & Poor's 500 Index ($INX) right now. Multiple expansion is one of the hallmarks of a bull market, as investors pay a premium for future earnings growth because they are confident in the upside. But if even if you take the highest forward projection for Twitter earnings -- 53 cents, according to Yahoo Finance data -- that's a hefty forward P/E of 71. Not a lot of room for error.

3. User growth is slowing

Given this lack of profits and sky-high valuation, investors must fall back to the idea of user growth as a path to future earnings. And while Twitter's past revenue expansion has admittedly been brisk, slowing user growth makes the prospect of future revenue growth less rosy.

Consider in its Q4 2013 numbers, quarter-over-quarter user growth was a meager 4 percent. And in its Q1 2014 numbers, users were up less than 6 percent quarter-over-quarter -- missing expectations. The only way I see Twitter making any headway for the rest of 2014 is to wow Wall Street with a turnaround in user growth in its upcoming earnings report. I'm not optimistic.

4. User engagement and monetization is slowing

Of course, Facebook (FB) has proven that slowing user growth doesn't necessarily mean slowing revenue growth. Twitter's bigger brother in the social media space has made a lot of headway by leaning on its revenue per user.

Unfortunately, Twitter has reported that its user engagement is slipping with just 157 billion timeline views in Q1 -- down from 158 billion in Q3 2013, despite an extra 23 million users on the platform. And most importantly, the company's ad revenue per 1,000 timeline views slipped quarter over quarter from $1.49 to just $1.44. Neither of these are encouraging trends, and both need to reverse course for Twitter to move higher. And like the overall user numbers, I don't see a very good chance of this in the upcoming earnings report.

5. Wall Street wants earnings

Of course, there's always room for some interpretation in the numbers and speculation about future growth. However, it's clear that while 2013 was a go-go year for tech darlings, 2014 is a much different story. As 3-D printing stocks flamed out, last year's sexy cloud computing stocks are in the red year-to-date and even tech giant Amazon (AMZN) has had a tough row to hoe since January.

As the market continues to ride higher and valuations begin to get stretched for many picks, investors want to see real results. In this environment -- and with shares already down 40 percent year-to-date -- Twitter is going to have to show some serious numbers if it wants to change the negative narrative that is out there on Wall Street right now.

--Jeff Reeves is the editor of InvestorPlace.com. Follow him on Twitter @JeffReevesIP.

More from MarketWatch

Jul 25, 2014 2:40PM
Twitter will be exposed as a primary tool for terrorists who attempted global take-over. Since you "subscribe" expect to be detained. It serves no other legitimate purpose. 
Jul 25, 2014 2:38PM
Time to dump your Twitter shares? You mean... you OWNED stock in a device used for collusion by cliques that blockaded jobs in America? Keep or sell, YOU are going to Hell for it. Better buy a hand basket. 
Jul 25, 2014 4:10PM

How about the fact very few actually tweet! Yet personally I stop at reason 1. I have an empty bucket that has the potential of being full of gold…care to buy it at ten thousand times its current value??? I will ship it for free….

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