Is Twitter About to Fulfill Its Potential?

 | Sep 14, 2017 | 1:00 PM EDT
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(This commentary originally appeared on Real Money Pro at 10 a.m. ET today. Click here to learn about this dynamic market information service for active traders.)

Is it time to get excited over Twitter (TWTR) ? It seems like every so often, investors see potential in the social media underdog -- a potential takeover candidate, a potential technical breakout, or some other potential that usually goes unrealized.

Could it be different this time? Over the past month, Twitter has put together a decent rally, gaining over 15% since August 11th. Is Twitter about to finally fulfill its potential?

I'm not excited by this rally for several reasons. First, let's deal with the Twitter's chart. The current rally has pushed Twitter very close to overbought territory, according to the stock's RSI (relative strength index) indicator. If recent history is any indication, this might be a good time to sell Twitter into strength.

Twitter's RSI indicator has reached overbought territory twice previously this year. The first overbought reading, which occurred in mid-May (notation A), led to a decline of about 17.5%. The second overbought reading, which took place in July, led to a plunge of nearly 25% (notation B).

When it comes to popularity and growth, Facebook (FB) sets the industry standard for social media. It's the most likely place to find old friends and pictures of far-flung relatives, and for many it is the only social media website. With over 2 billion active monthly users, Facebook is virtually irreplaceable.

Twitter, on the other hand, is far from irreplaceable. Despite having arguably the single most compelling social media attraction in the world in President Trump, Twitter's global user base has remained stagnant at 328 million for two consecutive quarters. Worse, the company is losing followers in the U.S., where its user base fell from 70 million to 68 million in the most recent quarter.

Here's a nightmare scenario for Twitter that almost nobody is talking about: what if President Trump suddenly decides to stop tweeting? Or worse, what if he decided to use a competing platform? Trump is unpredictable, so this isn't as farfetched as it may sound. A shift to a competing platform could be achieved within a matter of minutes.

There are numerous social media platforms available that are similar in nature to Twitter. If Trump were to suddenly ditch Twitter for an upstart social media network, he would pull users away while legitimatizing a competitor. In a sense, Twitter is at Trump's mercy, and may be more vulnerable than many of us realize.

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