Twitter is tanking. Over the last year share price dropped 64%.
The chart below shows Twitter’s wild ride back to Earth from the start of 2014.Twitter is still valued at an incredible $11 billion. That’s about one tenth the size of Nike ($100 billion) or McDonald’s ($110 billion).
In 2015, Twitter’s sales reached $2.2 billion. That’s up 58% from 2014… but net income showed a half a billion dollar loss. Twitter’s management continues to burn through cash. At what point will Twitter turn a profit? Will it take $5 billion in sales… maybe $10 billion? And more importantly, current sales growth isn’t sustainable.
At the end of 2015 Twitter had 320 million monthly average users. That’s up 9% from the previous year. Advertising to the users made up the bulk of sales ($2 billion). The remaining revenue came from licensing data. Twitter has done well with monetizing its users… but user activity growth is slowing.
Competition in this social media space is fierce. Twitter has 990 patents in the United States but I don’t believe it provides a wide enough moat. Many other platforms also allow live sharing of ideas and information.
A lot needs to go right to justify Twitter’s $11 billion valuation. That’s why I’m avoiding it.
High-flying tech companies often trade on hopes and desires. This can push share price to astronomical levels. Investors in these businesses focus on the ideas and products while overlooking crucial numbers.
A great deal of money can be made on momentum and the greater fool theory… but I wouldn’t bet money for or against Twitter right now. The following quote sums up my reasoning…
“The market can stay irrational longer than you can stay solvent”- John Maynard Keynes
I’d rather put time and money into great businesses trading at cheap prices. It’s all about the risk to reward. At Twitter’s current risk (cost) the chance of a higher reward is too variable.