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7 Great Reasons to Sell Twitter Inc. Stock

By Leo Sun – Oct 19, 2016 at 3:35AM

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The battered social network might look like a contrarian play at a 35% discount to its IPO, but it still has lots of downside potential.

Twitter (TWTR) has lost nearly 50% of its value over the past 12 months, and currently trades at a 35% discount to its IPO price of $26. Those steep declines might make Twitter look like a tempting contrarian buy, but it's not. Instead, investors should consider selling Twitter for these seven simple reasons.

Image source: Getty Images.

1. Buyers are walking away

Twitter abruptly popped to $25 in early October on takeover chatter. Disney (DIS -1.83%) was reportedly interested in buying Twitter to gain a new online outlet for news, sports, and entertainment. That growth could offset the weakness of its cable business, which has been losing subscribers to cord cutting. Salesforce (CRM 1.40%) then considered buying Twitter, presumably because the social network is widely used by salespeople to scout out potential buyers.

But then all that buzz died out -- probably because the rumored suitors realized that acquiring Twitter's platform meant inheriting all the problems it hasn't fixed yet.

2. Peaking user growth

Twitter's biggest problem is its dismal user growth. Its monthly active users (MAUs) rose just 3% annually to 313 million last quarter, compared to 3% growth in the first quarter and 15% growth in the prior-year quarter.

By comparison, Facebook (META 0.85%) grew its MAUs 15% annually to 1.71 billion last quarter. Without fresh user growth, companies will likely prioritize advertising on Facebook and Alphabet's Google over Twitter's "Promoted" ads.

3. Slowing revenue growth

With MAUs peaking, it isn't surprising that Twitter's revenue growth is also slowing down. Its revenue rose 20% annually last quarter, but that represented its slowest growth rate since its IPO in late 2013. Twitter's revenue rose 59% in 2015, but it's only expected to rise 15% this year and 13% next year.

TWTR Revenue (Quarterly) Chart

Source: YCharts

4. New initiatives aren't working

Many of Twitter's new advertising initiatives also simply didn't work. Former CEO Dick Costolo thought that letting advertisers pay lower prices for the distinct interactions (a click, reply, retweet, or favorite) they wanted would attract smaller businesses to advertise on the platform. Instead, it simply allowed its existing customers to pay less money for fewer ads.

Current CEO Jack Dorsey's believed that curating stories with "Moments" would bring back big advertisers, but interest in the platform quickly waned. It also failed to stand out against rivals like Snapchat's Live Stories and Facebook's Instagram Stories. Twitter also expanded heavily into video by buying Vine and Periscope, but those acquisitions still haven't turned Twitter into a video powerhouse like YouTube or Facebook.

5. Non-existent profits and high stock-based compensation

Twitter also isn't profitable on a GAAP basis. It posted a net loss of $103 million last quarter, compared to a loss of $137 million a year earlier. The primary culprit is stock-based compensation (SBC).

During the second quarter, Twitter spent 28% of its revenue on SBC expenses. Facebook, which is profitable on a GAAP basis, only spent 13% of its revenue on SBC expenses last quarter. Twitter's liberal use of stock bonuses instead of cash has also caused its share count to surge since its IPO -- inflating the stock's valuations and making it look less affordable as an acquisition target.

TWTR Shares Outstanding Chart

Source: YCharts

6. Insiders are selling

Twitter's high SBC expenses might be more forgivable if insiders simply held their shares or bought more shares on the open market. Unfortunately, Twitter's insiders sold over 4.5 million shares over the past six months, and bought just over 67,000 shares. That sour insider sentiment indicates that Twitter definitely isn't a contrarian play.

7. A very distracted CEO

Faced with all these headwinds, Twitter needs a focused leader. Yet Jack Dorsey is the CEO of Twitter and online payments company Square. Dorsey's supporters believe that as Twitter's co-founder and Square's founder, he's the most qualified to run both companies. 

But splitting his time between two very different companies isn't good for Twitter, which must make some bold and sweeping changes to get its MAU and revenue growth back on track.

The bottom line

Twitter's best hope at a recovery now is a buyout. However, potential suitors might wait for the stock to fall even further before offering Twitter a lifeline. Therefore, investors should avoid Twitter unless it takes big steps to fix those seven major problems.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, Twitter, and Walt Disney. The Motley Fool recommends 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.

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