MorningWord 6/12/15: ($TWTR) – Subtweet

by Dan June 12, 2015 9:40 am • Commentary

In case you missed it, Twitter (TWTR) is parting ways (he’ll stay on the board) with their beleaguered CEO Dick Costolo.  On last night’s Fast Money we spent a bit of time on the topic, and I wanted to breakout one discussion that I think is very applicable to other investments / trades that readers may be involved in.  One of our guests, long time tech investor Dan Niles of AlphaOne Capital, was unexcited with the management shake-up (watch here) but made a very important point. Investors often confuse/co-mingle the quality of stock with the quality of the underlying company. Niles said that TWTR has obviously been a bad stock… but it’s a good company.

I agree, TWTR has been a bad stock. But I also think the stock’s weakness reflects real disappointment with the company too. They’ve miss-executed on the product front, failing to meaningfully grow their user base and engagement. And they’ve completely failed to communicate any big vision of their future to investors.

So I would say there are three things that can be confused here. The stock, the company and the product. The product, in my opinion, (which Niles agreed with) is the one reason to own the stock, and coupled with the brand remains a very scarce social media property.

Regular readers know my view on the topic, the company will take a very long time to achieve the scale that Facebook (FB) has on the user front without being part of a much larger tech or media platform (e.g. Facebook, Google etc.).

The most obvious acquirer is Google (GOOG) and to be honest I think GOOG may need TWTR as much as TWTR needs them. GOOG is fighting a multi-front war to defend their slowly declining online advertising market share. Yes it was bound to happen, but Facebook is proving to be a very worthy adversary. They compete on almost every front, mobile, messaging, and video advertising. And obviously Apple’s (AAPL) growing services and iOS ecosystem poses other threats.

GOOG has three massive blindspots, 1) real-time search, 2) lack of a social media platform and 3) lack of mobile messaging platform.  An acquisition of TWTR, putting to use some of their $70 billion in cash on their balance sheet (which they do NOT return to shareholders) would solve most of these problems and at the same time provide the scale to finally grow TWTR’s monthly active user base (of 300 million) and quickly increase user engagement incorporating Twitter into the Google and Android ecosystems.

This is why I am long TWTR, someone will figure this out. Despite the uphill battle in the near term to re-invigorate growth.  For the next few months I suspect investors will give TWTR a pass, and I wouldn’t expect dazzling results or guidance when they report in late July, but barring a broad market meltdown I suspect the stock holds $35 prior to the CEO announcement.

When evaluating a stock as an investment (or trade), it is very important to separate a stock from the company but also its product. If the product is good, a management shakeup and a new vision on how to execute is sometimes all a company and a stock need.

In the case of TWTR, the last few months news flow has made it a bad stock, the executive turnover, miss-execution and poor communication has shows it’s probably a bad company. But the next few months, and upcoming decisions by its board (including evaluating strategic alternatives) will determine the future of a really good product.


New Trade – $TWTR: Bird Dropping