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Twitter Inc (NYSE: TWTR ) continues to rise, even as I have written off their stock gains as " irrational exuberance ." Admittedly, Wall Street has shown more interest in Twitter stock than I had predicted.
Changes to the user interface, renewed takeover speculation and a recent quarterly profit have driven the stock price higher by about 150% over the last year. However, with stagnant revenue and user growth, all Twitter stock catalysts remain psychological. Until Twitter can grow its revenues, the long-term future of TWTR stock appears uncertain.
Twitter Enjoys a Strong Niche
First, let's acknowledge that the battle between Twitter and Facebook, Inc. (NASDAQ: FB ) has been won by Facebook. Facebook's monthly active users (MAUs) stand at 2.1 billion vs. 330 million for Twitter.
Also, since both stocks launched their IPOs, FB stock has risen nearly five fold from its introductory price. TWTR stock has risen less than 40% from its original sale price of $26 per share in 2013. Clearly, Facebook has become the general social media site and social media stock of choice.
However, investors can still earn money from niches. In the niche of celebrity and political discussions, Twitter shines. I like using Twitter. The platform has allowed for direct communications with famous people. Also, political discussion, which is often difficult on Facebook, becomes mercifully succinct under the 280-character limit.
Moreover, Snap Inc (NYSE: SNAP ) cannot produce a Snapchat feature that Facebook cannot copy. Twitter's niche has so far proven safe from Facebook's attempts to co-opt features. A buyout remains Facebook's only likely option to co-opt Twitter's niche.
Twitter Stock Driven Too Much by Hype
Still, hoping for a buyout has not stood as a reliable investment strategy. So, the question remains, how does this niche translate into gains for Twitter stock? Unfortunately, the answer to that question remains unclear.
TWTR finally turned a quarterly profit in the previous quarter. As some of my colleagues have pointed out, the profit came primarily from cutting expenses. Revenues only rose 2% year-over-year.
When seeing this revenue growth rate, investors should pay heed to the following Warren Buffett quote: "In the short run, the market is a voting machine, but in the long run it is a weighing machine."
So far in 2018, investors have voted for Twitter, and the stock's price has risen by over 45%. Still, looking at other numbers, I see little "weight" that will drive up the stock price long term.
The Future of Twitter Lies in Revenue Growth
Aside from stagnant revenue growth, MAUs stand at roughly the same level as they did one year ago. Twitter gained some of its profit by cutting research and development spending. I know of no tech company that can succeed long term by skimping on innovation.
However, 330 million users and its status as the preferred platform for politics and entertainment discussion carries value. The company needs to find ways to unlock this value in ways that will translate into revenue. With a CEO who has his attention divided by also running Square Inc (NYSE: SQ ), that could remain difficult.
Still, signs of improvement have appeared. Twitter reports that live content and the higher character limit have paid off. It also claims this has helped increase the number of daily active users (DAUs) by 12%.
However, we all know of examples where people love a company's product but not its stock. For TWTR stock to rise long term, its changes must translate into revenue gains. Until the company produces tangible revenue and earnings increases, buyers of Twitter stock are making a bet, not an investment.
Bottom Line on Twitter Stock
The company has made improvements to its site, but until those changes translate into revenue growth, buyers of Twitter stock are speculating rather than investing.
Twitter has attracted a large number of MAUs and a strong following in a few niches. It also renewed interest with changes to its site. However, at some point, Wall Street will again care about revenue growth. TWTR needs to find a way to unlock the value of its MAUs and its niche.
Until its assets translate into consistently higher earnings, buyers of Twitter stock will be buying fleeting hopes rather than a solid business.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
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