After Thursday's column, I feel it is the right time to delineate my case against Twitter (TWTR) . So much of what I read in the financial media (not on Twitter, as I deactivated my account last week) on stocks is subjective, numbers-free blather, and in fact quite useless. So I have made it clear that Twitter is awful AND awfully overvalued, but let's focus on the second part.
How about a little actual financial analysis to bolster an opinion on a stock? Trust me, it feels good, almost as good as deleting your Twitter account!
First, we start with revenues. I am limited in space in this column, so won't have time to delve into Twitter's profitability metrics, but we live in a world where tech companies are valued based multiples of "revs," so I will stick with that. The key to any analysis of financial statements is disaggregation.
For Twitter we start -- and finish -- with the one metric given by management: mDAUs, or monetizable daily active users. Twitter changed to this metric in February 2019, and, in and of itself, it is meaningless. But it is a good base for modeling. Twitter's recent quarterly report showed 187 million mDAUs with 36 million users in the U.S., and 152 million abroad. I am assuming the difference is due to rounding.
That's where Jack Dorsey's ship will start to sink. Twitter -- and every social media company -- receives a strong valuation based on user base figures that are full of people who don't actually use the service, but do have an account. But with this latest movement -- of which I am glad to be a part -- folks are deactivating their Twitter accounts, not just ignoring them.
Those user numbers are going to plummet. I would expect this to happen when first-quarter figures are reported in April, not as much when full-year results are reported Feb. 9. How low can they go? Well Twitter's mDAU base is small to begin with, so that the initial drop-off will be quite noticeable.
It is the international figure that is more difficult to divine. Twitter's public affairs division Thursday astoundingly criticized the government of Uganda for restricting social media to prevent interference in an upcoming election (didn't Twitter just do that, repeatedly, here in the U.S.?) but the fact of the matter is that there are governments around the world that are authoritarian. Twitter has never been available in mainland China, for instance.
On a real user basis, I would expect Twitter usage to fall by about 50% here in the U.S., and for the service to be banned in some other countries, and for the others to fall in line with the U.S.'s decline. That gets you to 36*.5 + 50*0 (the banned) and 102 *.5 (the non-banned internationals.) That leaves you with a real user base of 69 million for Twitter. Of course they will twist the numbers to appear better using mDAUs IOUs, PDQs, or whatever new metric they can concoct. On Twitter's reported figures the revenue per mDAU (best to use a rolling four-quarter figure for revenues to produce an annualized number) was $18.11 in the third quarter, which is astounding. Obviously no one would ever pay to use Twitter, and I was unaware that advertisers were interested in the global demographics.
Extract that figure -- that's aggressive, by the way, the r/u will fall as the user base falls -- and apply it to our real user base figure of 69 million, and you get a real, annualized revenues figure of $1.25 billion for Twitter. This contrasts with the full-year figure of $3.46 billion in 2019 and my estimate for 2020 revenue at Twitter of $3.25 billion. This company was already shrinking...but now the dam will burst, in my view.
Even after this week's pullback, TWTR shares, inexplicably, were trading at slightly above 10x trailing revenues as of Thursday's close. But, using our "true" revenue estimate of $1.25 billion, we derive a fair value for TWTR of $15.63. This ignores the fact that TWTR had over $7 billion of cash on its balance sheet as of Sept. 30, and valuation is as much an art as a science, but I am just doing a back of the envelope here.
So, there's your math. Last Friday TWTR closed at $51. This Thursday It closed at $45. My fair value implies that it should be worth $16.
That is a short. Regardless of what you think of the company's management, and I think I have made my opinions abundantly clear, TWTR shares are just plain overvalued. Bet against them as you are deactivating your account. It will feel good!
