Avoid Twitter Like the Plague; It's Uninvestable

 | Oct 14, 2016 | 10:00 AM EDT
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With markets proving more volatile as the election and the next Fed meeting near, it's time to heavily scrutinize every single thesis underlying the stocks in your portfolio. That is especially true in light of the market's harsh reaction to brutal earnings-related news from big-name companies such as Action Alerts PLUS name Alcoa (AA) , Illumina (ILMN) and a couple of restaurants.

On that score, if Twitter (TWTR) happens to be one stock in the old portfolio, now is the moment to ask simply: umm, why? Why have you chosen to try and trade the the name based on the prospect for an offer from Salesforce (CRM) , Disney (DIS) or some Chinese company that has yet to emerge? Why do you believe Twitter's future is bright and so close to finally being reflected in the stock price?

The answers to all of these questions, at least from a rational person's point of view, should be that Twitter is one of the most uninvestable companies in the entire stock market (excluding penny stocks, of course) right now. Shares should be sold, with the funds dumped into an Apple (AAPL) that will enter the holiday season with a host of premium-priced new products and a major competitor in Samsung that is absent a key product (and the type of news flow that may impact sales of its TVs, refrigerators, etc.).

Here is a basic checklist on why Twitter needs to be avoided like the plague ahead of its earnings report later this month:

Unknown Twitter Culture

Tech companies thrive on their people. These are bright folks who basically get paid handsomely to have no life, sitting around coding and discussing ideas in the fancy company lounge literally around the clock. The pace of change in tech is very rapid, so it's essential to have the best and brightest in the trenches each and every day, with a burning desire to kick ass.

By all outward indications, Twitter's culture has been ruined by constant talk of a sale, key executive turnover and stale financial results. Nothing gets techies down like sustained poor results; it makes them feel worthless.

Ultimately, the fact Twitter CEO Jack Dorsey had to send out a rallying cry email this week to employees is quite telling as to the state of the company's innards. It's reasonable to expect an exodus of talent within the next six months, which in turn could further impact product reinvention goals and efforts to jumpstart stalled user growth.

Look at the Price Action

The market is saying two things on Twitter at the moment, both of which point to a state of concern regarding the company. First, the company has proven that's its future isn't as bright as execs try to persuade people to believe. Twitter went public in 2013 at $26 a share, quickly jumping to over $45 on the first day of trading. As rumors of a sale swirled last month, shares rebounded to about $24 - still below anything printed by news organizations on that first day of trading.

The read here is that any formal bid for Twitter may be disappointingly low, given concerns about its future. And Twitter execs realize any formal offer will be of the lowball type and are holding out for that one great quarter that they can take to a suitor and say the turnaround is imminent. Unfortunately, that quarter is unlikely to come soon, so execs have created an unsavory situation for investors.

Secondarily, since the deal talk has quieted down, shares have dropped back to $17.80 and are now down about 40% over the past year. The market has returned its focus on Twitter's near-term performance, voicing an opinion that the third quarter will likely show meager sequential and year-over- year revenue growth. Meanwhile, the bottom line will still be ugly and user growth tepid at best.

If Twitter puts up this type of dreadful quarter, it will likely set off another steep selloff as investors question the company's viability, potential need to raise should it choose to stay public and the harsh reality that the company's general state of ugliness will keep suitors on the sidelines.

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