Twitter Inc. stock is down nearly 10% in the Year-To-Date. However, TWTR stock could be headed even lower. Here is why.
Twitter’s life as a publicly listed company has been short, and bitter for the major part. The San Fransisco, California-based micro-blogging company listed at a market cap of nearly $25B, which was called expensive at the time of the IPO. Twitter Inc. (NYSE:TWTR) immediately proved the naysayers wrong, gaining 60% in just 2 months following the IPO. However, the $39.3B valuation was the peak and the ride thereafter has pretty much been downhill. The Micro-blogging platform is today valued at a market cap of $10.6B, down 58% from its listing valuation and 73% from the post-IPO peak. That’s been Twitter’s story, and it isn’t going to get better anytime soon. The future for TWTR stock looks just as bleak as the past, if not worse. Here is why we would be wary of buying into the micro-blogging platform even at these seemingly ‘cheap’ or ‘beaten-down’ prices.
The company has delivered little to justify valuations.
At the time of its listing, Twitter was valued at a whopping 44.8x its trailing twelve month (TTM) revenue of $534.5M, and the company has achieved little to justify those lofty valuations. Yes, the company has managed to grow its top line at a rate of 56% YoY, but that growth hasn’t dripped down to the bottom line. (Also, growth in recent quarters has dropped to single digits, which is worrisome.) Twitter continues to bleed money, with the company having reported a net loss of $456.9M in FY 2016. Not surprisingly, the TWTR PS ratio has dropped to sub-5 levels, with Twitter stock currently quoting at 4.14x its TTM sales. However, it is hard to justify even these valuations, given Twitter’s bleeding bottom line. The only time Twitter valuations look attractive is when you compare against Snapchat. And well, this isn’t saying much, given that Snapchat enjoys insane valuations which are far from sustainable. All in all, topline growth is the biggest positive Twitter has delivered in the three years since its IPO. Is that good enough? Well, not good enough to justify the lofty valuations.
The emergence of the biggest competitor.
The fundamentals of Twitter are just one-half of the story. And, while the micro-blogging platform has been taking steps to rectify the sorry state of the fundamentals, the story could have gotten just a bit more scary on another front: competition. In fact, the emergence of a new competitor could bring into question Twitter’s status as the number one micro-blogging network. Yes, you read that right. As per various news sources, Mastodon, a relatively new micro-blogging platform founded by 24-year-old Eugen Rochko, is the latest challenger to Twitter’s ‘cult status’ among micro-bloggers. And, people are starting to take notice. According to Jack Morse from Mashable, Mastodon is “an underdog with serious spunk.” Comparing the two networks, Morse writes that the increasingly popular social network delivers a Twitter-equivalent micro-blogging experience, but with better privacy controls.
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