On Aug. 11, Twitter (TWTR) issued a public statement to address yet another company rumor: “There is absolutely no truth to the claims whatsoever,” the social media firm told Reuters. Though whispers have circulated about a possible takeover bid in recent months, the company wasn’t reacting to such speculation.
It was ensuring its long-term survival. In the previous 24 hours, #SaveTwitter had become one of the top trending hashtags on its own platform. More than 100,000 tweets that morning expressed support to save the micro-blogging giant after a false report that it would shut down operations in 2017.
It was the 21st century version of “Save Ferris,” from the 1980s film “Ferris Bueller’s Day Off.” But Ferris was never actually sick.
Twitter, however, is far from healthy. Twitter’s stock hit an all-time low of $13.73 in mid-January. The stock has pushed higher since to more than $20 by mid-August on news that it was developing an app for Apple TV. But it’s still a far cry from its 52-week high of $31.87 and its all-time high of $74.73 in December 2013.
With Twitter’s leadership and long-term strategy under pressure, investors are wondering if this is a company that can be saved – presenting a buy-low opportunity – or is the #SaveTwitter hashtag a sign of future problems?
A company under pressure
Since Jack Dorsey became Twitter’s full-time CEO -- for the second time -- in October 2015, the firm has faced a series of highly publicized challenges.
Turnover at the executive level has been high, a challenge that prevents the firm from solidifying under a single vision. Such turnover has complicated its advertising revenues, as clients worry that the firm isn’t as developed and mature as Facebook (FB), Google (GOOG) or even LinkedIn (LNKD).
User growth is cooling. While the company was losing money in 2015, active users declined in the fourth quarter from 307 million to 305 million, according to Statista. Since last fall, user growth has increased, but the growth rate has underwhelmed investors and analysts. Year-over-year user growth has fallen from more than 60% in 2012 to single-digit growth. The service hasn’t been able to attract new users, and a small percentage of active users comprise the majority of interaction on the platform (see “Growth flattening,” right).
Then, there are public perception problems. In June, the company reported that hackers had stolen 32 million passwords and sold the list on the dark web. Reports would later show that Dorsey’s personal account was also breached.
In July, the headlines were no better. A lack of authentication protocols has fueled public examples of anonymous bullying. Comedian Leslie Jones left Twitter in June after becoming the target of online trolls — individuals who fuel discord across the Internet by posting inflammatory content designed to upset users. Trolls inundated Jones’ account with pornography and racist messages.
Most of these problems predated Dorsey’s tenure, says Howard Lindzon, the CEO of StockTwits, a social media platform that allows investors, traders and entrepreneurs to share ideas. But it’s clear that Dorsey has a lot of work to do.
“I don’t think Twitter needs a turnaround strategy,” Lindzon says. “[Jack Dorsey] is trying to plug the holes of the bad strategy that came before him. They’re just plugging holes. You fix one thing and that opens up 10 other holes. When you’re going backwards — even though it’s a great company and a great product — you’re still going backwards, and trying to retain users and still trying to grow. When you’re pulling and your boat’s taking in water, it doesn’t matter how good the captain is, you just have to keep bailing water out of the boat.”
Lindzon argues that the one problem that hasn’t received enough attention is the firm’s perception among developers. In the first issue of Modern Trader, our editors highlighted the success of new financial technology firms that capitalize on Twitter’s data feed. This included Dataminr, which uses Twitter data to break news for traders before it hits CNN or the newswires.
Those companies are harder to find these days. Lindzon says he hasn’t seen anything recently that generates such excitement. There hasn’t been a significant migration to Twitter by developers in recent years.
“They just don’t have the trust,” Lindzon says. “If I’m a developer today, I don’t trust Facebook, I don’t trust YouTube, I don’t trust Twitter. It’s a really tough environment for developers. The last thing people want to do is build on Twitter because you can’t raise money.”
Still, Lindzon, who regularly writes about the company on his daily blog, bought the stock after it passed $19 per share. A devoted fan of the platform, he is long Twitter stock and thinks that the firm can correct its legacy challenges.
Gossip rag or communications platform?
Despite these challenges, Dorsey remains optimistic. In February, when the company reported a downturn in active users, Dorsey saw it as a chance to improve the company’s image and its product.
“There’s a lot of opportunity to fix the broken windows and confusing aspects of our product,” Dorsey said during a February conference call.
The CEO also stressed that the company is focused on building on a vision of being a real-time communications tool.
“Twitter is live: live commentary, live conversations, live connections,” he said.
That live nature is the double-edged sword of the firm’s technological success. In theory, it levels the communications field between every user. Whether you’re an A-list celebrity or a housewife in Omaha, every person has direct access to one another and broader 140-character conversations. There’s no discrimination in how the messages are shared and received.
“As a utility, people still love it. I love it,” says Lindzon.
“I don’t think Jack has an easy job and that’s obvious based on the performance so far. But he’s cleaning up. It’s not about growing when you still have to clean up technical debt, structural debt, capital structure debt from the previous six, seven years.”
The downside to the technology has been seen in public vitriol. In May 2015, Slate writer Katie McDonough referred to it as a cesspool. She wasn’t the first person to make this statement, and she won’t be the last. McDonough’s criticism centered around a 60-page report about the swelling problem of online harassment targeting women. In June, New York Times editor Jonathan Weisman quit the platform after his frustration over how Twitter has addressed a slate of anti-Semitic messages directed at him. Weisman said he was “moving to Facebook where at least people need to use their real names and can’t hide behind fakery to spread their hate.”
Venture Capital guru Jason Calacanis recently chimed in on the company’s challenges in a letter and pitch he “ghostwrote” for CEO Jack Dorsey. “It’s kind of embarrassing that Twitter can’t figure out [how to control harassment] on their own.”
Calacanis writes that a “Troll-Free” Twitter is coming, but it will require a lot of work. He writes that the company needs to protect anonymity as some voices “need to be heard without revealing their identity.” This includes political dissidents and parody accounts. But Calacanis argues that verification processes would reduce the amount of harassment and should be universally adopted by June 2017.
But where will Twitter be next year, before these hypothetical changes took shape?
Is it Wall Street’s fault?
In February, Emily Jane Fox at Vanity Fair penned a spirited defense of Twitter’s business. Fox argues that Wall Street’s lofty expectations of the micro-blogging firm are unreasonable and hindering the company’s outlook.
“Wall Street is the company’s worst problem,” Fox writes. “Investors have been dogging the company to make these changes so it could see some version of the kind of hulking growth Facebook and Google regularly achieve, and even newer kids on the block Instagram and Snapchat have delivered.”
Fox’s concerns have some merit, but it’s hard to look at the firm’s ongoing harassment problems and blame shareholders. Besides, if the company isn’t cut out for investors’ expectations and demands for returns, perhaps it should not have been a public company in the first place.
After all, the numbers looking forward are signs of a company that is lacking profits.
According to Zacks Investment Research, the company is expected to finish the year with a P/E ratio of -47.10. By 2018, that figure surges to -116.35. Comparatively, Zacks projects Facebook to trade at a 20.5 P/E ratio, and Alphabet (GOOGL) to trade at 22.5 in 2018.
Keith Fitz-Gerald is the chief investment strategist at Money Map Press, a Baltimore-based financial research firm. For the last three years, he hasn’t been shy about his concerns about Twitter, its valuation and its future as an organization.
“I think it’s wishful thinking that this company can succeed,” says Fitz-Gerald. “Twitter has gone so low for so long — the question investors should be asking themselves is ‘will Twitter survive?’ Whether the situation is more like BlackBerry remains to be seen. You hope there is some redeeming value in patents or customer growth.”
In October 2013, when investors were eager to snap up shares of Twitter after its IPO filing, Fitz-Gerald wrote with the hashtag #CountMeOut.
“The valuations being assigned to it range from $12 billion to as much as $25 billion,” he wrote at the time. “That’s asinine for a company that hasn’t shown any profit potential.”
Fitz-Gerald questions whether the company should be trading on the public markets.
“In the old days, a company like Twitter could never have been public in the first place,” he says. “It would have needed an established revenue stream, profitability and customer base. The purpose of going public was to enhance the capital structure and expand operations.
But there was a transition in the Dot-com Era. Now, too many IPOs, including Twitter, are based on hope — on business models that are unproven.”
Fitz-Gerald recommended that investors short Twitter in his 2014 outlook. At the time, the stock was trading at nearly $69 per share and was not far off from its all-time high. He argues that the IPO made a lot of people wealthy. Fitz-Gerald explains that founder Evan Williams quickly became a billionaire. CEO Jack Dorsey earned $596 million. Former CEO Richard Costolo made more than $190 million. Venture firms who took part in the firm’s six funding rounds made more than $500 million. Underwriters raked in millions.
“Sadly, the executives got rich, while most retail investors have lost their shirts,” he says.
Fitz-Gerald warned early on that the numbers simply didn’t add up for the company, and they still do not today.
“It’s a shocking ‘secret’ that most retail investors will never understand: the numbers have never lied, and when it comes to much ballyhooed companies like Twitter, they never do,” Fitz-Gerald wrote in May. He pointed to a specific set of numbers at the time that rarely make the headlines. “Ask yourself if you’d invest in a company that’s reported the following,” Fitz-Gerald writes, “A product that more than one billion people have tried and abandoned? A product that has stagnated at barely 300 million users when competitors like Facebook and Tumblr have more than 1.65 billion and 555 million, respectively? A product that has users on it only 66 times a month versus Facebook with 268 sessions per user per month as of February, according to Verto Analytics?”
Who could buy Twitter?
Fitz-Gerald does propose one possibility for the company: Selling.
“Twitter is at best a buyout candidate, and at worst a flameout à la Polaroid,” he wrote in June. The company’s technology is an attractive asset, despite the other headaches that accompany it.
Jiri Kram is a Netherlands-based cloud architect who covers the technology markets (see “The 9 hottest tech companies that could be acquired,” page 30). A popular figure on LinkedIn, Kram has received a wealth of questions about potential suitors of Twitter.
Kram places Microsoft at the top of the list. “Microsoft will be willing to go as far as $20 billion,” he says. “Because unlike with LinkedIn where Nadella paid a premium to stop Marc Benioff [and Salesforce.com], in the case of Twitter the danger of a losing bid is not that high. The market knows it, that’s why expectations are built into the current price, which will go up if rumors of a Microsoft takeover are confirmed.”
Kram also sees synergy for Apple (AAPL) and Google as likely buyers. He rates Amazon (AMZN) and Facebook as firms looking at Twitter as a takeover bid.
He also says that Verizon (VZ) could consider a deal as it seeks competitive advantages against AT&T Corp. (T).
The final suitor is the most surprising. Kram speculates that Visa (VISA) could purchase the company should it merge with Square and become a FinTech company. Given Visa’s increased pressures from substitute payment firms, Twitter and Square would give Visa a massive payment network.
The bigger question is: Why would they even want to buy this firm? For Microsoft, Kram argues that it fits into the company’s broader strategy under CEO Nadella. “It’s for the same strategic asset as the “Mobile First, Cloud First” strategy,” says Kram. “Satya Nadella is aware of the power Twitter has and untapped potential it could have as well as synergies with Linkedin, Azure, Bing, Windows and other Microsoft key products.”
Why you shouldn’t expect a “bailout”
Despite Twitter’s attractive technology and large user base, Fitz-Gerald argues that investors shouldn’t own the stock just because they believe it’s a possible takeover target as many believe is the case today.
“Right now, owning Twitter is a lot like going to a Vegas casino with roughly the same odds,” he writes. “No doubt you could get lucky if Google, Facebook, Microsoft or Apple, for example, get interested, but I wouldn’t count on it.”
Fitz-Gerald argues that investors will find far more profitable alternatives with companies that develop “must own” products and services in industries such as medical technology, defense companies and even critical infrastructure because Wall Street cannot hijack them and Washington cannot screw them up.
He states that investors should place their money in the name of profits and real growth, not hope.
“We’re talking about a company that has a real chance of not existing in a year,” he says.
Lindzon also isn’t sure that Twitter presents much opportunity for its other tech rivals.
“There are rumors everyday about who could or would buy them,” Lindzon says. “But it just doesn’t feel like Facebook or Google wants the headaches that Twitter actually has. The problem I have is that they haven’t solved all of the hate and the spam. I don’t think that’s a problem that Facebook and Google really want to bring on.”
If the company is going to be a real acquisition target in the future, Jack Dorsey has to focus on two major decisions.
“Twitter has two major tasks: Decide what Twitter is and decide how it will make money,” says Kram. “Twitter is way behind Facebook, LinkedIn and Google in monetizing its user base. Twitter is powerful, but does it have a sustainable economic model?”
That question is why Wall Street seems to be locked in a wait-and-see approach to the company. According to TipRanks, the consensus rating for TWTR is a “Hold.” Twenty of 28 analysts rate it a hold, with five buys and three sells (see “Listening to the street,” left).