Dulat Atabek
4
All posts from Dulat Atabek
Dulat Atabek in Trenders,

Dangerous position of Twitter

Do you know what Twitter is? Twitter is a global platform for public self-expression and conversation in real time. Hah..Seriously everybody know about Twitter and their amazingly successful IPO. But, maybe not so many people know about the problems of Twitter. And these problems don't only concern recent price downfall of their shares, which you can watch on this graph:

This downfall in prices is not so dangerous as another factor. This factor is that the number of active users in the Twitter stop to rise fast enough. What we mean by "fast enough"? It means that their "core" user basewill not increase, which will lead to the several consequences:

1) For Twitter it would be harder to rise further their revenue from advertisement, which make 90% of sales, as this revenue type depend on the size of audience of the Twitter.

2) Declining speed of incoming users is one of the signals that Social Network is close to its peak. After this peak will be reached, Social Network can die. And die very fast.

Second consequences can lead to the death of the whole company, as their portfolio of other Social networks is not so big in comparison with Facebook, which hasWhatsapp and Instagram.It means that after the death of Twitter, company had no substantial reserves.

In order to prove that Twitter has issues with new users, we should watch more precisely on their MAU (Monthly Active Users). MAU is defined by Twitter itself as:

"We define MAUs as Twitter users who logged in and accessed Twitter through our website, mobile website, desktop or mobile applications, SMS or registered third-party applications or websites in the 30-day period ending on the date of measurement. Average MAUs for a period represent the average of the MAUs at the end of each month during the period."

However, MAU is not free from the automated activity, which clearly should be deducted from MAU. Adjusting by automated activities, we will have following situation:

However, in their annual financial report, they use "whole" MAU as an indicator of the increasing number of users:

Yeah... It is fine, Twitter tries to fool its own investors. Clear change in the MAU is very small, if you would compare it to the other networks, for example Facebook:

For the period of time from 2013 to 2014 Twitter’s "dirty" MAU raise by 44 million, comparing to Facebook's 165 million in the same period.

There are more "fancy" facts. Chris Sacca is a large and well informed investor in Twitter, recently stated that almost 1 billion users have tried Twitter but don't start use it further. Together with 316 million active users at the end of the Q2 of 2015, this means there must be about 1.3 billion Twitter existing accounts. It means that it is very hard to Twitter to grow further, as they already lose huge amount of potential users.Recent initiatives by Twitter, like abandon of "140" rule, do not seem to have made a big impact on the users.

The more dangerous indicator is that, DAU (daily active users) raise for the very small margin for the first-half of 2015. They have grown from 138 million users to 139 million users. Using the fact that DAU mostly create content and watch advertisements, it could mean that Twitter position even more dangerous. Another indicator, that activity of users don't increase, is that number of tweets sent per day are same for the last 3 years. It is equal to (astonishing for 2012 ) 500 million tweets per day.

Also, to Twitter experienced managerial issues as Twitter didn't have CEO for several months, until Dorsey returned as CEO of the company. As Dorsey is one of the founders of Twitter, many investors gave him huge margin of trust. However, even in the case, that Dorsey have clear vision how to help Twitter to rise again, there is serious factor why new CEO can't help to company at all.

This factor is thatJack Dorsey is also CEO of Square, who has more important things to do, such as being all tied up with exhaustingly running Square's IPO process and roadshow for the next 3-6 months.

Final problem is financial results of Twitter. Twitter financial results continue disappointing investors, as they continue to make negative income for the last 5 years. This fact become more worse, as they assured in the pastthat would be profitable in the 2012. Combining this with the fact that their Free Cash Flow is also negative for the last 5 years and the big insiders sell, we can conclude that Twitter hardly become profitable in the near future.

Considering all above information, we think that for valuation of Twitter stock, most conservative methods should be used.We used Net Current Asset Value and Tangible Book Value methods for valuation of Twitter stock.

Net Current Asset Value (NCAV) is defined by Benjamin Graham as:" current assets alone, minus all liabilities and claims ahead of the issue."

So for Twitter NCAV per share would be:

NCAV = (current assets – [total liabilities + preferred stock] )/ # of share outstanding =$3,32

Tangible Book Value method is theoretical amount of money which shareholders will receive if the company is liquidated. Tangible Book Value per Share for Twitter is:

Tangible Book Value per Share = (total equity - preferred stock - intangibles)/ # of share outstanding = $4,44.

Two conservative approach gave almost equal numbers: $3,32 and $4,44 for share. Current Twitter price is $25,18. This discrepancy can be too huge for intelligent investors, consideringa lot of fundamental problems of Twitter.

Concluding our analysis we recommend investors to SELL shares of Twitter. In the case, when an investor wants to earn money on the current discrepancy, we recommend SHORT SELL Twitter shares by buying put-options on the Twitter.