Twitter Stock: It may be time to sell (NYSE: TWTR)
Twitter (NYSE: TWTR) was the epitome of mixed success. It took years for the company to report a substantial amount of revenue, relying almost solely on ads served on the platform with no real targeting metrics, and then years without making profits, followed by an unequal profit environment subject to change with the winds of American political discourse.
Twitter is going to see some obvious ups and downs over the next few years, as it tends to see higher ad revenue during election years or during major global or national events. But the basic growth we’ve seen over the past 2-3 years, I believe, will die out as the pandemic-era boom, which has seen billions of people stuck at home for an extended period, coming to an end. Thank God.
But what that means for Twitter is that it’s likely to lose active users over the next year, something it hasn’t always done since its inception. This means that the total addressable market for advertisers is going to shrink on the platform, leading to lost revenue and profit, as those advertisers go elsewhere for a better return on ad spend.
However, the biggest risk is also the most publicized – the battle of Elon Musk. Since the bid buyback price is up to $54.20 per share, a potential redemption will mean that any hypothetical short position will be subject to an instantaneous and unrecoverable loss of almost 30%. Let’s discuss the factors.
The current figures
Therein, I believe, lies the short potential. Current analyst expectations, aggregated by Seeking Alpha, call for the company to post a good rate of growth in revenue and earnings per share, although some market experts and myself (who is not a market expert ) expect the company to get rid of some active users over the next 6 to 12 months in the United States but also around the world.
The company is expected to maintain its spotty and sporadic reporting of EPS numbers with a 426% rise expected this year, followed by a 23% decline next year, 2 years of double-digit increases and a 10% decline in 2026. This puzzles me given the expected slowdown, although I do expect activity to pick up as we head into the 2024 US presidential election, which will no doubt boost activity overall platform.
On the revenue side, analyst aggregates predict a small 4.5% increase this year, which is then expected to transition to low single-digit growth over the next 5 or so years.
Expectations VS Reality
In fact, after reporting a 74% year-over-year increase in revenue in the June 2021 fiscal quarter, the company reported slowing revenue growth, until it reported a 1.1% year-over-year decline in revenue in its latest report. . The company is also expected to post growth close to 0% over the next 2 quarters.
|June ’21||Sep 21||December 21||March 22||June ’22|
(Source: Seeking Alpha Income Statement – TWTR – Y/Y Growth)
Additionally, after reporting modest revenue in the past, the company’s last 3 quarterly reports have missed their projections by an increasing percentage – a slight 0.4% in the last quarter where they missed their sales expectations. more than 11%. Even though earnings have had their ups and downs with projections of 3,700% beaten in the penultimate quarter by a failure of 400% in the third quarter of last year, revenues will tell the ultimate story. and it seems to be going in the wrong direction.
The margins are not too hot
Another negative expectation of mine relates to the company’s margins and profits. This is divided into 3 distinct segments:
Revenue cost increased in recent quarters as it takes the company more investment to generate the same amount of revenue as it continues to compete with companies like Meta’s Facebook (META), Instagram and Snapchat (SNAP), which attract advertisers with their higher ROI on ad spend.
In the most recent reporting year, the company saw a slight increase in revenue, but its gross profit was down about $100 million from the previous year because of this, which means it has even less money to spend on managing acquisition of advertisers and other potentials. product launches.
Operating expenses increased thus, the company paid an additional $200 million in general and administrative (sales, general and administrative) expenses and nearly an additional $300 million in R&D (research and development) expenses. All these figures are annual.
As a result, their operating profit has gone from a surplus of around $300 million last year to a loss of more than $200 million in the past 12 months. It’s a trend that I hope will continue in the coming quarters.
Debt and interest expense is also a concern, especially as interest rates rise in the United States. The company has taken on considerable debt and at the time of writing, much of that debt is still at interest rate-linked rates, which have risen sharply in recent months.
The company’s long-term debt has grown from $1.7 billion in 2018 to more than $5.2 billion according to its latest report. This is where things get a little murky – the company’s interest charges have fallen from $152 million a year to $51 million a year after interest rates fell to zero during the pandemic. from COVID-19, but increased in the last reporting quarter to $63 million. I expect these numbers to rise sharply in the next quarter due to rising interest rates and increasing corporate debt.
The main risk is still Elon Musk
Elon Musk planned to buy Twitter for $54.20 per share. That’s nearly a 30% premium to today’s price of around $42.00 per share, which means that if the deal is actually made by court order, at which we should we expect in the coming weeks, the share price may skyrocket overnight and there will be virtually no way to recoup the losses as the takeover offer is final.
However, I do not believe that the takeover will materialize. Musk cited several issues with the company and it is unlikely that a judge, however powerful, could force a private entity to buy another under current economic conditions and given all the terms of the agreement. OK. This means that Twitter will get a windfall of 1 billion dollars if the deal is terminated, but that shouldn’t do much compared to the company’s $32 billion valuation.
The other, albeit lesser, risk is the 2024 US presidential election. I believe that given the strength some political parties have had with fundraising off the platform during election cycles, given that the probability that the 2024 election is a repeat of the 2020 election, there will be increased activity on the platform.
This will mean that we are likely to see an increase in the number of active users of the company and will lead to increased revenue and profits for the company. While this is a risk for the hypothetical short position, it is hard to see it lasting long past this time, so a long-term view will most likely overcome this factor.
Conclusion – Is it worth being short?
Right now, my lean is that the company is overvalued. With my projected growth rate, I think a futures price of 20 times the earnings multiple is appropriate, valuing the company at about half of what it is today, or $20.00 per share.
The main risk of a short is unlimited losses versus limited profits, but even so I think a combination of the official takeover failure as the company continues to lose active users without much alternatives will result in a loss of approximately 20% to 30% of its value.
Another big factor is that I have a mostly long portfolio, and with the increased risk of some form of recession, I’m looking for companies that would perform negatively even without one, but would fall more than others if we had one a. Twitter fits that profile for me and is an additional factor for my opinion that this is a good short to medium term position opportunity.
While I remain cautious on the company’s long-term outlook, I am bearish on their short- to mid-term outlook and as a result will be taking a short position through short stock positions and some currency puts. January and June 2024 at the $25 and $20 price strike.