At the end of last year I wrote that Twitter (TWTR) was among my least favorite stocks for this year, despite the strength at the time that saw the stock trading up around $70. The only problem with this seemingly brilliant call is that I first became negative at around $50. Incidentally, I have always detested the fact that most pundits leave that important information out when singing their own praises. Writing an article urging people to sell gold at $1700, say, would be noteworthy, but less useful to followers if you had been screaming “Sell!” since it first broke through $500/oz. Self-promotion is, some would say regrettably, a part of the modern world, but it doesn’t mean that we shouldn’t be able to admit that we sometimes get trades and ideas wrong, even if only in their timing.
So, in all honesty, I have to admit that I became negative on TWTR shortly after the IPO. The stock is back to the level that I started making bearish growls, so the unwritten rules of internet punditry hold that I should just highlight the later call and either go quiet or say that now is a good time to buy. The problem is, however, that I remain a skeptic. It is not that I doubt the value of social media; I have been and remain positive on Facebook (FB), for example. It is just that, in an old fashioned kind of way, I have a preference for companies that are good at making money; FB has shown it is one and TWTR has not.
The strength of TWTR on that run up to around $70 at the end of last year took me by surprise, but the surge was at least in part due to reports of an ever growing user base. It would seem reasonable that, like FB, TWTR will eventually work out how to monetize you and me, so reading value into popularity makes some sense. The problem is that, as MySpace found out just a few short years ago, popularity in the social media world can be fleeting.
I don’t think Twitter is about to do a MySpace and disappear from view any time soon, but with any such platform there comes a time when exponential growth in the number of users must stop. Eventually, most of those who have an interest have already signed up. Some will remain active and others will fade away, but the rate of growth, at least, will slow. This could be hastened if people become weary of the kind of self-promotion that I mentioned earlier. It may also be hastened if the platform becomes increasingly used to attack people for things taken out of context.
Far be it for me to defend Stephen Colbert (Lord knows he is quite capable of defending himself!), but the recent storm in a teacup surrounding the satirist has pointed out a basic problem that Twitter has. Satire, or even subtlety, is impossible to capture in 140 characters or less. This particular incident was more a question of inept use of Twitter, but it does highlight one of the problems. Maybe I am just a naïve and overly optimistic old man, but I believe that the more the dangers of an instant, shallow response are publicized, the less appealing it will become.
There are, the bulls say, enormous revenue opportunities for Twitter, even if the rate of user growth does begin to slow. Facebook and others have shown that mobile ad revenue can be huge and the ability of social media to capitalize on the “multi-screen watching” behavior patterns of the modern TV viewer do undoubtedly have potential. In my opinion TWTR may have trouble tapping into that potential, however.
Twitter is all about immediacy, so it is unlikely that users would take kindly to the type of “pre-roll” ad that most of us already find annoying when we encounter them. Synchronizing ads with TV offers potential, but it is hard to escape the feeling that if TWTR begins to interrupt users’ experience with ads, even on the periphery, people will find another place to interact. If Twitter’s story has taught us nothing else, it’s that if a platform can achieve popularity the founders and early owners can get extremely rich, even if they struggle to make any money for later investors. Somebody will launch an ad-free version of Twitter if there is a demand and will attract investors, even with a business model that is obviously unsustainable.
Meanwhile, in about a month, TWTR will once again report quarterly earnings.
It is unlikely to be as disastrous as the February release when the stock lost around 23% the next day. In fact, that mess will have tempered expectations somewhat, so an improvement is almost inevitable.
This, combined with the fact that we are currently bouncing around support at $45 makes it difficult to trade a bearish view of TWTR around here. I am, however looking for an opportunity. A significant move either way will provide it. If there is good, or rather, less bad news next month, then selling into the resulting rally will be my preference. In the meantime, however, any breakout below $45 makes a test of grading lows around $40 very likely, so should be used as a trigger for a short with a fairly tight stop.
It is quite possible, probable even, that TWTR will, at some point soon figure out how to monetize their enormous popularity and actually turn a profit; it may even come this quarter, although expectations are generally for a small loss. Until they do, however, the stock’s prospects rest on continued user growth. The emergence of “hash tag haters” that the Colbert story has highlighted and a growing distaste for shameless self-promotion, as well as just the law of large numbers, may limit that growth. TWTR may not be a sell right now and right here, but with no profit and the prospect of slowing user growth it will be when it moves, whichever way that may be.