New blood and fresh ideas: Twitter's business is stalled but investors see reason for hope
- Twitter is slated to report its fourth-quarter results Thursday morning.
- The company is expected to report its fourth-straight quarter of declining sales.
- The report comes as the company's stock has soared and bulls have been touting Twitter's underappreciated value.
- But it also comes amid a long list of dangers and concerns about the company, including the presence of networks of automated bots on its service and the departure of its chief operating officer.
You might think, given the impressive gains that Twitter's stock has notched over the last year, that the social networking company's business is on fire or that investors are drooling over its future prospects.
But that's not exactly the case.
Indeed, about the best that can be said about Twitter from an investment perspective these days is that shareholder and analyst expectations for the company are so low that it has a great chance of exceeding them.
"They need to prove that they're not the next Yahoo, that they're not a dying platform," said Darren Chervitz, a portfolio manager at Jacob Asset Management, which owns shares in Twitter. "If they can do that - and that's not a high bar - investors will be rewarded."
When the company reports its fourth-quarter earnings before the market opens on Thursday, not many people are expecting to see a major turnaround in its business. Revenue is expected to decline 4% from the same time last year to $686.4 million - the fourth consecutive quarter of declining sales. Wall Street's adjusted EPS target of 14 cents would also be below what Twitter earned in the year-ago period.
Analysts expect Twitter's topline to return to growth in the first quarter, with $571.7 million in sales. But while that would represent a 4 increase from the year-ago period, it's still less than the revenue Twitter generated two years ago, in the the first quarter of 2016.
"It's a pretty low bar for success," said Kim Forrest, a portfolio manager at Fort Pitt Capital Group. Although Forrest follows Twitter, her firm doesn't own shares of it.
Twitter stock has soared even as its results have been sub-par
The subdued expectations for Twitter stand in contrast to how its shares have performed of late. Over the last year, they're up more than 40%, besting the performance of not only the Dow and the Nasdaq, but also the shares of Facebook and Google, the company's much bigger and more successful rivals.
The bull case for Twitter has been that the company is simply underappreciated. It has some 330 million monthly active users. That number isn't anywhere close to Facebook's 2 billion users, and it's not growing very quickly - particularly in the United States - but it it still represents one of the largest user bases in the world. And, unlike that of many companies, its audience is global.
"It's not Facebook's size, but it still is a fairly well-known international brand that's used around the globe," Chervitz said.
And even with its recent stock rise, Twitter still can look like a bargain next to Facebook and Google. Its market capitalization of $18.7 billion is less than 4% that of Facebook and less than 3% that of Google.
At some point, as long as Twitter can show that it's not going out of business and that its service is still vibrant, another company is likely to recognize what it's worth and snap it up, Chervitz said
"There's value there that hasn't been recognized in the financial results as well as in the asset value," he said.
The fight against fake news offers Twitter an opportunity - and a danger
And there's another reason to be optimistic about Twitter. In response to charges that its own service had been hijacked to spread propaganda and fake news, Facebook has been making major changes, de-emphasizing news stories and posts from media and other organizations.
That could give help Twitter better differentiate its service - which thrives on breaking news stories - from Facebook and could help Twitter lure in new advertising dollars.
Facebook's moves are "forcing publishers and online advertisers to 'dip their toe in the water' on the Twitter platform and start to ramp up ad investments," said Daniel Ives, a financial analyst at GBH Insights, in a research report issued on Monday.
Since the 2016 election, Twitter, Facebook, and Google have been under scrutiny for how their online services have been hijacked to spread propaganda and fake news. Twitter in particular has come under the microscope for the role networks of automated accounts - so-called bots - have allegedly played in amplifying propaganda. This week, Politico reported that Russian-linked Twitter bots helped to raise awareness about Rep. Devin Nunes' memo about alleged FBI bias in its investigation of Donald Trump and put pressure on Congress and the president to publicly release it.
Such incidents have raised questions about how much control Twitter and its rivals have over their services and the degree to which they are being used to undermine the US political system. Concerns over such issues could lead to government regulation.
"If you're a vehicle that's helping people yell, 'fire' in a movie theater, if you are somehow putting people at risk or at harm, that calls out for regulation," said Forrest. She continued: "It's a huge risk."
Twitter has some big questions to answer
The incidents raise an additional worry. They highlight that there's reason to question just how many Twitter users are actual living, breathing human beings.
"I think it hurts" the company," said Chervitz. "From an investor's standpoint, you obviously have a tough time getting a sense of how big the platform really is."
The departure of a top executive at a company that's already struggling is usually not a good sign.
"You never want to see destabilization when you're not sure how the business is going," Chervitz said.
On the other hand, his departure could be viewed as a positive. It's not like Twitter's recent results were setting the world on fire, noted Forrest.
"They are kind of treading water," she said. "So a fresh pair of eyes might be just what the doctor ordered." Who those fresh eyes might be is not clear. And with Noto out, there's likely be more questions about whether CEO Jack Dorsey should continue splitting his time as CEO of both Twitter and online payments company Square.
The company will also likely face questions about its video plans. Like other tech giants, including Facebook and Apple, Twitter has been getting into the streaming video business. It made a splashy deal two years ago to stream Thursday night National Football League games then lost those rights a year later to Amazon even while it struck a new deal to stream other NFL-related videos.
But overall, Twitter will be trying to reassure bulls of its long-term value - even as it is expected to post another quarter of declining sales.
As Chervitz puts it, "Obviously, it's a complicated story."