The Simple Reason I Still Won't Buy Twitter Inc.

Back in Aug. 2015, I told investors to ignore Twitter (TWTR) as it dropped back to its IPO price of $26. My reasons were simple -- its monthly active user (MAU) growth was abysmal, its turnaround strategies didn't make sense, and its stock-based compensation expenses gobbled up too much of its revenue.

Since that article was published, the stock has lost more than 40% of its value. Today, the bulls claim that CEO Jack Dorsey's new turnaround plans, insider buying, and the return of co-founder Biz Stone indicate that brighter days are ahead. However, I still won't buy Twitter for one simple reason -- its core advertising business remains stuck in a nasty decline.

Image source: Getty Images.

MAUs are rising, advertising revenue is dropping

Ever since Twitter went public in late 2013, investors seemed more concerned about its MAU growth than its advertising revenue growth. Even as MAU growth stagnated, Twitter squeezed out more revenue per user with new ad services. Unfortunately, that trend abruptly ended during the fourth quarter of 2016, and worsened last quarter with an 11% drop in ad revenues.

Source: Quarterly reports.

That big decline was mainly attributed to a 60% year-over-year decline in the company's ad prices. During the conference call, COO Anthony Noto claimed the cheaper ads would increase the overall ROI for advertisers -- and theoretically bring back big customers.

That strategy sounds flawed, since Twitter is giving up pricing power to attract more advertisers. But there's no guarantee that those advertisers -- which likely favor bigger platforms like Facebook (META -10.56%) and Alphabet's (GOOG -1.96%) (GOOGL -1.97%) Google -- will ever come back.

This strategy reminds me of former CEO Dick Costolo's introduction of a cost-per-engagement model back in 2014. Under that plan, Twitter allowed marketers to only pay for the interactions (clicks, replies, retweets, likes) that they wanted, instead of all interactions. That strategy was aimed at attracting smaller advertisers with lower marketing budgets, but it backfired and let its existing customers to pay less for fewer ads -- a blow Twitter still hasn't recovered from.

Why the situation is getting worse

Jack Dorsey, who returned as Twitter's CEO in late 2015, hasn't offered any better ideas. His initial turnaround effort was Moments, which curated trending tweets into a newspaper-like tab. The product made Twitter's timeline less chaotic, but it was quickly overshadowed by Facebook's Instagram Stories and Snap's Snapchat Stories.

Dorsey subsequently cut jobs, killed the Vine app, sold most of its developer tools to Google, and tried to sell the company. When its potential suitors walked away, Twitter signed new live video streaming deals with Bloomberg, Buzzfeed, The Verge, and other websites. However, it also lost its lucrative NFL licensing deal to Amazon in April -- demonstrating how easily bigger tech companies could outspend Twitter.

Twitter's reputation has also been repeatedly tarnished by cyberbullying, abuse, extremist accounts, and the proliferation of fake news. As President Trump's favorite communication tool, it has also become a hotbed of political controversies. All these factors make Twitter a hazardous minefield for advertisers and potential acquirers.

Consider buying these social media stocks instead

Social media is still a great growth industry, but Twitter is arguably one of its worst plays. Instead of investing in Twitter, investors should consider Facebook, which offers double-digit growth in both MAUs and ad revenues; Tencent, which dominates the Chinese social media market with WeChat; and Weibo, the "Chinese Twitter" which eclipsed Twitter's MAUs during its most recent quarter.

If Twitter's ad revenues start growing in tandem with its MAUs again, I'll take a fresh look at the stock to see if it's a worthy investment. But until that happens, I'd avoid this beaten-down stock.