Twitter (NYSE:TWTR) is in a world of hurt these days. Share prices have fallen 20% in 2016 and 42% from last October's 52-week highs. This could be a fantastic turnaround story in the making, assuming that the social network can set its financial house in order. But I'm not here to search for signs of a bounce.
In my view, Twitter remains a risky stock even after these recent share price plunges. Here are three solid reasons why you should stay away from this stock until further notice.
The basic conundrum: Monetization drives away users
The harder Twitter attempts to squeeze money out of its micromessaging service, the faster users run the other way.
Longtime Twitter users know what I'm talking about. The service used to be a plain and uncluttered way to send brief messages into the ether. Now, the Twitter feed bombards you paid-for promoted messages as the company tries to eke out a profit. The service bends over backwards to give more column space to its superstars, squeezing out lesser lights and non-commercial messages. It's like watching a cable TV station with nothing but ads.
The fun is gone, unless you're a Twitter expert and surrounded by other masters of the tweet. And this excessive devotion to ad revenue is starting to show in Twitter's subscriber counts.
The service had 313 million active users per month in the recently reported second quarter. That's a measly 3% year-over-year increase. That's down from an 18% jump in 2014 and a 25% increase in 2013.
That stalled user growth curve just won't do for a supposedly electric social media stock that's still trading at a premium-level 33 times forward earnings. The growth engine is dead, because this company has failed to find a workable balance between revenue and user engagement. And when the user count turns downward, revenue figures must soon follow suit.
I sure don't want to own the stock when that happens.
Where's the moat?
The monetizing issue could be swept aside if Twitter offered a dramatically different service surrounded by a strong business moat. If Twitter simply was your only choice for broadcasting short messages, users might just hold their tongue and deal with the distracting ad-style messages polluting their Twitter feeds.
But that's not the case anymore. Facebook (NASDAQ:FB) is moving its "wall" feature closer to the Twitter model all the time. A plethora of Twitter-like services have sprung up in recent years, giving frustrated users alternative paths -- often tailored to focused niche markets such as video gaming or fashion.
Twitter has started taking action on these threats, censoring tweets with links pointing to a competitor. The company reserves the right "to remove or refuse to distribute any Content on the Services," so this behavior is well within Twitter's terms of service. But it isn't a shining example of defending free speech and individual expression.
A strong technology business would simply work hard to make its service better than the rest. But Twitter's R&D budget actually fell 10% year over year in the second quarter, while revenue grew 20% higher (and active users, as seen earlier, were largely treading water).
That's the exact opposite of what Twitter should be doing, and another sign that the company's moat may shrink even further in future quarters. No thanks.
Ironically, Twitter's attempts to kick-start the revenue generation engine aren't even boosting the average revenue per user (ARPU).
According to fellow Fool Adam Levy, Twitter's domestic ARPU stood at $4.74 per user in the second quarter. That's down from $5.28 in the first quarter and $6.31 in the fourth quarter of 2015.
International ARPU figures are also heading down, falling 5% quarter over quarter to land at $0.90 per active user.
By comparison, Facebook's ARPU is both on the rise and much more substantial than Twitter's. The rival social network collected ad revenue of $13.06 per active North American user in its most recently reported quarter.
In other words, I don't see anything working here. User growth is stalled, sales per user are plunging, and the company seems uninterested in doing anything about it. That's a good recipe for the next MySpace or Friendster -- not for the next soaring turnaround stock story.
Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.