After yesterday's RM column on Twitter (TWTR) and Facebook (FB) and their now obvious positioning as content publishers, not just social media platforms, I decided to take a look at Twitter stock. I figured, "Oh, well, just another overvalued tech stock trading at 10x revenues." Well, as of this writing, TWTR shares - slightly in the red for the day after yesterday's platform outage - are valued at 10.26x 2019 revenues. Okay, so I was off by a few basis points. But why? What is it about this company that makes it worth $35.5 billion on an intrinsic basis?
If you have been reading my (RM) columns, you know where I am going with his. The short answer to the aforementioned question is "nothing." Nothing can justify Twitter's current valuation. What is interesting about TWTR versus other tech stocks is that a) the stock is not at an all-time high and actually sits a couple bucks below the level it reached in December 2018, and b) Twitter is not growing, as evidenced by the 19% decline in revenues on a year-on year basis that Twitter reported for the quarter ended June 30th.
So, that's what you have if you own Twitter. The least growth-y of the growth stocks, and, arguably. the least tech-y of the tech stocks. Twitter's second quarter was absolutely brutal from a financial perspective, with negative operating income of $123 million much more relevant than reported Net EPS loss of $1.56, which was driven by creation of a deferred tax asset.
How does a tech company lose money at the EBIT line? Well, according to Twitters' 2Q earnings press release, operating results were affected by "civil unrest in the U.S." You have got to be kidding me. I am entering year 30 of reading ridiculous excuses for missed earnings, but that one has to take the cake. It was the protests.
So, with that mind-numbingly dumb explanation for poor financial performance aside, I have to ignore the area where Twitter reported real growth in the quarter. This is Twitter's user base, or what it now reports as mDAU, or "monetizable Daily Average Users." This is quite clearly a metric that was picked out of a bunch of terrible ones, because it makes Twitter look like it is growing. When Twitter shifted from reporting monthly average users (a metric which showed little to no growth for years) to mDAUs with its 1Q2019 earnings results, management included this incredibly evocative passage with its earnings slides:
In making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated
So, in essence, just take our word for it. Well, I would never do that, so I don't care that Twitter reported 44% y-o-y growth in mDAUS in the second quarter any more than if they reported 44% growth in IOUs, KPIs, WKRPs or any other hare-brained metric. Revenues declined 19% in the quarter, and revenues per user, by Twitter's count, obviously fell much further. That is a figure reported to the SEC, and that is the one I will use.
OK, so there's no there there. If you read my RM column yesterday, you would know that I find Twitter's management to be vile and would never put any of my or my clients' capital in their stock. Point made.
But is this thing a short? That, as I mentioned yesterday, also comes down to politics. If Trump wins re-election, Twitter would be squarely in the cross-hairs of the FCC with regards to Section 230 of the Communications Decency Act. Perhaps that is why Twitter worked so hard to bury a story in a legitimate news outlet (New York Post) that showed Trump's opponent in such a bad light.
I don't know. I do know this. Pure content publishers are trading at multiples of revenues that are fractions of what the social media "platforms" like Twitter and Facebook are afforded.
According to YCharts data, Comcast (CMCSA) , which is clearly a content publisher through many channels, is trading at 1.9x trailing sales. Ascribing the CMCSA valuation to TWTR actually yields a fair value of $8.81 for TWTR. TWTR stock hit an intra-day low of $20.00 during the Covid Crash in March of this year. Don't think it can't reach those levels again.