Twitter Still A Good Long-Term Bet, Even As Shares Stumble On Spending

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It’s been a devastating month for Twitter (NYSE:TWTR) bulls. The stock has been among the worst performers in the S&P 500 after plunging about 20% during that period.

The selloff is raising fresh worries about the stability of this social media giant after years of underperformance.

Twitter Still A Good Long-Term Bet, Even As Shares Stumble On Spending

Twitter (TWTR) – 1-Year Chart

The latest bout of selling started after famous Twitter bear Michael Nathanson warned last week that the company’s spending is going to spike in the remaining part of this year and into 2019. The company reported 0% growth in operating expenses in the first quarter and 3% growth in the second.

But in a note to clients the MoffettNathanson founding partner said these numbers don’t paint a true picture:

“After digging into the most recent 10-Qs, we would argue that true underlying cost growth has actually been materially higher in the range of +13% to +15%. Given Twitter’s dire need to improve platform safety and invest in more video content, we believe that expenses are set to escalate into the back-half of the year and in 2019.”

In July, Twitter shares reached a multiyear high close to $48 before its disappointing second-quarter earnings in July, sending the stock tumbling by more than 27% as the company showed an unexpected decline in its number of monthly active users. That number is crucial to provide Twitter with a strong footing, which, having debuted in 2013, wasn’t able to post a profit until the fourth quarter of 2017.

This year marked a turning point for Twitter. The company started becoming profitable on a rising number of users and spending cuts. For three of the past four quarters, Twitter has posted double-digit earnings surprises.

Despite the disappointing developments over the past couple of months, we still believe that Twitter’s growth story hasn’t lost its appeal.

Twitter Is Here to Stay

No doubt this is a difficult time to be a social media company. Twitter, Facebook (NASDAQ:FB) and Google parent Alphabet (NASDAQ:GOOGL) are under great pressure to improve their network security, rid their platforms of fake news and purge foreign operators like those who influenced the last US elections and can do the same in the future.

These media companies are going to face additional scrutiny this week when several social media executives testify at a Senate Commerce Committee hearing on safeguards for consumer data privacy Wednesday. To become a more credible platform, Twitter is in the midst of an intense cleanup effort, removing millions of suspicious accounts that post misleading links, sensitive information or disturbing content.

Such efforts are certainly going to push costs higher and depress profitability in the short run. But these are favorable developments for long-term investors, which will make Twitter a more acceptable platform for both users and advertisers. There might be some more weakness on user interaction metrics as Twitter intensifies its crackdown on fake accounts, but that doesn’t mean Twitter is losing its usability.

By the end of the second quarter there were more than 500 million tweets being posted on its platform every day. Twitter had 335 million monthly active users, with 68 million in the US and 267 million internationally.

Video, Mobile Will Fuel Revenue Growth

Video content, which is one of the main components of Chief Executive Officer Jack Dorsey’s turnaround strategy, will continue to strengthen Twitter’s appeal to advertisers. That segment now accounts for more than half of Twitter’s ad revenue.

Twitter’s real-time highlights and video partnerships have positioned the company as a broadcast and communications network, making it complementary to all other forms of media, including TV. Twitter is also well-positioned to benefit from the large shift in dollars toward mobile and native advertising.

In the first-quarter, Twitter launched a less data-intensive version of its service called Twitter Lite. It’s part of the company’s efforts to attract users in low-data, remote parts of the world, such as India, where Twitter found the “app was way too slow to access.”

These new areas of growth aren’t going to dry up as Twitter deploys more resources to monetize its huge user base.

Bottom Line

The selloff in Twitter stock since its second-quarter earnings report has made it attractive for long-term investors who have the patience to wait and see the company working through the current challenging environment for social media companies.

The company is going through a tough balancing act as it spends for growth and cleans up its network. Nevertheless, as its product continues to improve, we believe both users and ad growth will come back strongly.

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