{"id":55527,"date":"2014-08-06T06:29:04","date_gmt":"2014-08-06T10:29:04","guid":{"rendered":"http:\/\/countingpips.com\/?p=55527"},"modified":"2014-08-06T07:03:42","modified_gmt":"2014-08-06T11:03:42","slug":"why-twitter-investors-were-just-duped","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/08\/why-twitter-investors-were-just-duped\/","title":{"rendered":"Why Twitter Investors Were Just Duped"},"content":{"rendered":"
August 6, 2014<\/div>
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\"Twitter<\/p>\n

By Louis Basenese<\/a>, Equity Analyst, WallStreetDaily.com<\/span><\/a>
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Last week, I got put on the proverbial hot seat when I was asked to analyze Twitter\u2019s <\/b>(TWTR<\/a>) second-quarter earnings report on CNBC<\/a>.<\/p>\n

Our discussion was in real time\u00a0\u2013\u00a0after investors had just bid up shares nearly 30% in after-hours trading.<\/p>\n

Big mistake!<\/p>\n

Sure, the company crushed expectations. Twitter reported a 124% increase in revenue. It added 16 million new users to the network. And it actually turned a profit (on a non-GAAP basis).<\/p>\n

But an insidious trend is gaining momentum. One that threatens to undermine shares in a hurry, too.<\/p>

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Bigger is Better<\/h2>\n

Everyone agrees that social media investments are all about the network.<\/p>\n

The bigger, the better, as it means there\u2019s more potential to generate advertising revenue\u00a0\u2013\u00a0and, in turn, profits.<\/p>\n

However, \u201cThe question investors need to ask,\u201d says Richard Greenfield of BTIG, \u201cis how big is Twitter\u2019s monetizable universe?\u201d<\/p>\n

Precisely!<\/p>\n

On the surface, Twitter\u2019s increase in monthly active users to 271 million bodes well for its future. That\u2019s obviously what prompted such a bullish reaction to the company\u2019s quarterly report.<\/p>\n

Upon closer examination, though, it turns out that 14% (or 38 million) of those 271 million users don\u2019t ever see any advertisements. That\u2019s because they access Twitter through various third-party applications. And Twitter can\u2019t serve ads in those applications.<\/p>\n

The trend isn\u2019t moving in the right direction, either.<\/p>\n

In fact, the number of users accessing Twitter via third-party apps increased by 24% during the quarter, even though Twitter plainly stated in its S-1 filing that it expected these figures to decline <\/i>over time.<\/p>\n

Meanwhile, the number of users accessing Twitter via its website or mobile app only increased by 3.9%.<\/p>\n

Put more simply, Twitter is unable to monetize the bulk of its user growth.<\/p>\n

Sure, Twitter might <\/i>one day <\/i>figure out a way to monetize users of third-party apps. But do you want to risk your hard-earned capital on a possibility?<\/p>\n

Not me! Especially when shares are already trading at a steep valuation.<\/p>\n

Consider:<\/p>\n

Twitter\u2019s monthly active user base is one-fifth the size of Facebook\u2019s<\/b> (FB<\/a>). And its revenue per user is 50% lower.<\/p>\n

Yet Twitter trades at a 44% higher<\/i> price-to-sales (P\/S) ratio.<\/p>\n

At current prices, Twitter sports a P\/S ratio of 27.0, versus Facebook\u2019s 18.8.<\/p>\n

Now, for those of you who want to cry foul for comparing the two social media networks side-by-side, spare me!<\/p>\n

When Twitter\u2019s CEO, Dick Costolo, repeatedly says he wants to reach everyone on the planet, it\u2019s clear that he expects to achieve the same scale. And he\u2019s far, far<\/i> from it.<\/p>\n

If Twitter can\u2019t show a clear path to one billion users, it\u2019s destined to be a niche service. And a niche service is completely undeserving of the premium valuation that shares currently sport.<\/p>\n

Remember Rule #1: Stocks Ultimately Follow Earnings<\/h2>\n

Did I mention that Twitter isn\u2019t even really profitable, either? Well, it\u2019s not.<\/p>\n

Sure, the headlines trumpeted the fact that Twitter reported a profit of $0.02 per share for the quarter. Giddy Wall Street analysts even tripped over each other to raise their respective price targets on the news. But that was on a non-GAAP basis.<\/p>\n

On a GAAP basis, the company actually reported a loss<\/i> of $0.24 per share, thanks to an unbelievably high amount of stock-based compensation expenses (close to 50% of revenue).<\/p>\n

In the long run, profits matter above all else. They\u2019re what ultimately drive stock prices. And it\u2019s going to be years until Twitter reports any legitimate profits.<\/p>\n

Not until 2017, according to JP Morgan<\/b> (JPM<\/a>) analyst, Doug Anmuth.<\/p>\n

And if the growth in users who don\u2019t see any advertisements continues to accelerate, like I expect, it could take much longer. Caveat emptor!<\/p>\n

Ahead of the tape,<\/p>\n

Louis Basenese<\/p>\n

The post Why Twitter Investors Were Just Duped<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

By Louis Basenese<\/a><\/p>\n

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Related posts:<\/h4>\n
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  2. Friday Charts: Gold Bugs, Government Waste and the Latest Stock Implosion <\/a><\/li>\n
  3. The Biggest Con of the Last 10 Years, Finally Busted! <\/a><\/li>\n<\/ol>\n<\/div>\n

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     <\/p>\n","protected":false},"excerpt":{"rendered":"

    By Louis Basenese, Equity Analyst, WallStreetDaily.com Last week, I got put on the proverbial hot seat when I was asked to analyze Twitter\u2019s (TWTR) second-quarter earnings report on CNBC. Our discussion was in real time\u00a0\u2013\u00a0after investors had just bid up shares nearly 30% in after-hours trading. Big mistake! Sure, the company crushed expectations. Twitter reported […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-55527","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/55527","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=55527"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/55527\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=55527"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=55527"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=55527"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}