MorningWord 7/29/15: No Time To Wallow In The Mire $TWTR

by Dan July 29, 2015 9:32 am • Commentary

With or without Dick Costolo, Twitter’s management is draped in buffoonery. Last night’s Q2 conference call (watch here if you’re a masochist) was an absolute disaster for investors. And I say that as a guy who likes to point out that most executives are less than honest with investors when their backs are up against the wall. But last night, Twitter co-founder and interim CEO Jack Dorsey and former golden-boy CFO Anthony Noto painted a fairly dire picture for user growth in the near future for the social media platform.  There were few silver linings. But ultimately, this could be a good thing for investors. There’s a scarcity value in the Twitter platform that is not adequately reflected in their enterprise value (now less than $20 billion) and management is essentially admitting they haven’t done a good job making sense of that platform to the average user. And as far as the stock setting up for a long term reversal, management did their best to kitchen-sink the outlook and set up for a series of beats.

Last night on CNBC’s Fast Money, as the news was hitting the wires and the stock initially popped, my first reaction that the news was that it was poor, and the stock would likely be sold:

The stock quickly reversed as the conference call went on, and now in the pre-market, it is down about 10% from the previous close, and about 20% from last night’s post markets highs. I am long the stock and increasingly considering whether to wait around for these guys, but here are a couple take-aways.

Investors think the next positive catalyst is the announcement of a new CEO. If it is Dorsey I suspect investors will not react positively as he is a fairly known quantity at this point. It will clearly be a wait and see afterwards. And what about internal candidate who many think is a front runner for the job, Adam Bain, head of Revenue and Partnerships?  I think investors will see this as a weak. Given how brutal investors/analysts and the financial press was towards Dick Costolo, I would expect a very short honeymoon for an internal hire. In my mind, the risks to the CEO announcement are mainly to the downside unless they can pull a rabbit out of a hat and hire some sort of tech visionary, or maybe an odd choice of a private equity / venture capital star.

Audience and Ad Loads: sequential user growth is pathetic, and I am not a big fan of trying to figure out the value of logged off users.  I also don’t believe that the product is that confusing, but many do. The company needs to figure out how to get more mainstream uses of the platform. There are so many possibilities here, including blatantly copying services like Snapchat and WhatsApp which could add a sort of stickiness to the platform (which is the goal with periscope.) But ultimately Twitter’s challenge of going mainstream like Facebook have always been the same going back nearly a decade. The people that use Twitter understand it and love it. Those that don’t have no idea how it works or why hashtags have no spaces between words, or why you have to click on the @ names to see who that person referred to is, or why a photo takes up part of the 140 characters, or why until just recently they didn’t allow you to quote a tweet without having to copy and paste it and use a code at the beginning like RT, or why a tweet with @ at the beginning gets sorted into a different stream, or why a group conversation is impossible because all the @names once you’re over 2 people take up the character limit. You know, all the insane inside baseball stuff that makes Twitter cute and insular (and annoying) for its users but makes it challenging to reach a broader audience.

If you are an active user then you have noticed in 2015 increased ads and promoted tweets. On the call last night management stated that they think they can significantly increase ad loads. This could show a near term bump in sales and earnings, but without user and engagement growth, advertisers are not likely to increase their ad budgets on the platform.

And Lastly, I think this is the only reason in the near term to hold onto the stock.

Potential for M&A: I have been steadfast in my belief that Twitter is an amazingly unique social / mobile messaging platform, and would see a fairly quick acceleration in user growth if integrated into a larger multi-media platform, like Google, or Facebook.  Twitter’s current public market value is less than that of WhatsApp purchase price of $22 billion last year by Facebook.  Which is nuts when you think that no one outside of the WhatsApp guys and Facebook knew what the mobile messaging apps user base was and the key metrics. The point here is simple, if Twitter’s mis-execution was not already in the public eye, the company would likely be one of the highest valued private companies in the world, not far behind Uber.

But here is the thing, if market history tells us anything its that owning a stock for a take-over is usually a losing proposition.  The longer a company wallows in the mire, as Twitter is doing in 2015, the less likely they are to be viewed as viable acquisition target. Its my belief that the company and the product will have a very successful future, but in the near term the stock could continue to be volatile from the low to high $30s.