As the three major market indices marked all-time highs Thursday, Twitter (TWTR) stood as a refreshing reminder that this exuberant market can still punish subpar execution. TWTR shares fell 12.3% on the day to $16.41. I have been relentlessly negative on TWTR shares for Real Money and my other writing platforms and, as a bear, the quarter actually answered three key questions for me.
Why couldn't TWTR's board complete a sale of the company in November? I was wondering, "What is in the book?" What was so objectionable in the materials produced by TWTR's bankers (Allen and Co. and Goldman Sachs) that scared away such media giants as Disney (DIS) , News Corp. (NWS) , Google (GOOGL) and Salesforce.com (CRM) , all mentioned as potential suitors in published reports? (Disney is part of TheStreet's Trifecta Stocks portfolio. Google is part of the Action Alerts PLUS portfolio.)
Simply put, the scary numbers were TWTR's fourth-quarter results. Twitter's advertising revenue fell 1% year on year and costs rose 11%. Pricing is the largest issue for Twitter as the company's cost-per-engagement continued to erode in the quarter, plummeting a scary 60% versus the year-ago period.
Also, any thought of a Trump bump for TWTR was obliterated by the quarter's results. Advertisers pay for engagements, clicks, registrations ... getting people involved. There's no give-and-take, no follow-up, no click-through produced from one of President Trump's tweets. It's just a unilateral message, and why anyone thought this would help Twitter's bottom line (BTIG upgraded the shares prior to the earnings report based on the Trump-bump premise) is totally beyond me.
Will the problem keep getting worse; i.e., is there more downside in TWTR shares? Yes, unequivocally. With the fourth quarter's shareholder letter, Twitter management has ceased giving revenue guidance. That's troubling enough on its own, but the guidance they did provide was shockingly downbeat.
Specifically, TWTR guided to adjusted EBITDA for the first quarter of 2017 of $75 million to $95 million, a massive decline from the $180 million posted in 2016's first quarter. It's possible -- although management did not state this on their conference call -- that Twitter's leaders have finally realized they have been charging sponsors far too much to access their platform. Advertisers have a way of making that information known in brutal fashion.
Will Twitter's constant restructuring yield changes, perhaps even at the CEO level? After listening to the conference call, the answer certainly seems to be no. TWTR CEO and co-founder Jack Dorsey was as inscrutable as ever on Thursday morning's call. Instead of tangible steps to turn around the classic "scissors" evident in TWTR's financials (lower revenues/higher costs), analysts were treated to comments like this one from Dorsey:
"I would say -- I don't know if it's surprising but every single year the fact that Twitter just grows in its impact and influence and how instrumental it is in the global conversation, how essential it's become as one of the first places people go to, to get a sense of what people are thinking and what people are saying about any global event."
If your company is so essential, why do advertisers pay less and less each quarter to engage with your users, and why have your shares so wildly underperformed those of your peers?
The emperor has no clothes. Until that shock of recognition occurs to Dorsey and/or his board, the shares will be ripe for shorting. I have done so every time TWTR shares approached (and crossed through on takeover speculation in October) the $20 threshold. That strategy has worked four times in the last 12 months, and if that's what it takes to make a profit in the short side of his raging bull market, then I'll have to keep picking on Twitter.