Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Twitter is stuck in the canyon of corporate sadness. What's on the other side is still a big unknown.

The company already has told investors that 2017 is a lost year. Advertisers have decided Twitter is too small and sickly to be a useful marketing medium for them, and as a result Twitter's revenue from ads has suddenly started to drop. Like a stone. In the second quarter, Twitter's total revenue fell nearly 5 percent from a year earlier. 

Free Falling
Twitter's quarterly revenue has declined this year for the first time in the company's history
Source: Bloomberg

That means Twitter is a "growth" company that is shrinking, it doesn't turn a profit under any conventional meaning of the word and it competes directly against Google and Facebook, two of the most successful companies of the last generation. Other than that, things in the Twitter-verse are peachy. 

Twitter knows it is swimming against a strong current. The company has said it is focused this year on winning more users and on turning non-fictional profits. That is grand but it's really Twitter's only choice when its revenue is falling. 

There was also a hiccup in Twitter's strategy to convince more people to try it out or come back to Twitter after a hiatus. The number of monthly users rose by 15 million people from a year earlier to 328 million. Facebook over the same period added 294 million users. That's cruel. And the user number was flat from the first quarter. Twitter shares sank in pre-market trading Thursday, likely over disappointment with the mild user-growth number. 

Twitter has said the number of people who use it daily are climbing at a faster rate, which shows the people who are on Twitter are using it more avidly. I'm reluctant to give the company too much credit because its disclosures are quite bare-bones on this figure.

Filling the Nest
There is slow growth in the number of people who use Twitter at least once a month
Source: Bloomberg

Twitter has a plan to keeping people hanging out longer to watch live video programming including sporting events and news. Again, this is good in theory but I just don't buy the Twitter turnaround story. Its ideas in video programming are interesting, but many other tech companies have similar video strategies. And Twitter has not shown it is capable of executing even when it has good ideas.

Plus every dollar in new advertising money Twitter hopes to take -- after this fallow year, of course -- will likely need to come from advertisers' budget that they spend on Google or Facebook ads. That's a hard sell. Google and Facebook have consistently demonstrated their abilities to convert ad clicks into purchases or other advertiser goals. Twitter's biggest selling points are...tweets from Donald Trump?

Twitter investors' expectations are oddly both low and too high. Twitter has been smart about telegraphing its lost 2017 and ditching underperforming assets so it has a lower bar to clear next year. Stock analysts aren't forecasting revenue increases until early next year. Before Thursday's earnings report, only four out of 39 analysts recommended investors purchase Twitter shares, according to Bloomberg data.

Inexplicable
Twitter shares have climbed 34% since the company reported first quarter earnings

Still, enough people are encouraged to buy -- maybe because they believe the company will get acquired at a premium. Shares have climbed 34 percent since Twitter's last earnings snapshot in April because results weren't as bad as expected.

Even using Twitter's preferred profit measure that excludes its very high stock compensation costs, Twitter has a higher multiple than Facebook based on the average of expected adjusted earnings before interest, taxes, depreciation and amortization for the next 12 months. In no rational universe should Twitter be more richly valued than Facebook. On the basis of expected revenue, Twitter shares are much cheaper than Facebook's.

Warren Buffett's investment advice includes being greedy when other people are fearful. You have to be very greedy not to be fearful about Twitter. 

 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Twitter calls these "resurrected users," which is my current favorite piece of business jargon.

  2. Bloomberg News and Twitter have collaborated on television news including the U.S. presidential debates, and the companies have also announced Bloomberg will create exclusive programming to web stream round-the-clock on Twitter.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net