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The Case Against Twitter

By Motley Fool Staff - Feb 27, 2018 at 11:30AM

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It seems like the tide might finally be turning for the downtrodden social media giant, but you may want to sit this one out.

Shares of Twitter (TWTR -1.14%) soared about 50% after the company reported news of its first-ever GAAP-profitable quarter. That prompts the question: Is now the time to buy? After all these years, is Twitter finally about to take flight?

In this segment from Industry Focus: Tech, analyst Dylan Lewis and Motley Fool contributor Evan Niu explain why that probably won't be the case, and why long-term investors might want to stay away from this stock if they're aiming to beat the market.

A full transcript follows the video.

This video was recorded on Feb. 23, 2018.

Evan Niu: If they can really keep these costs in line, for example, there's been years of speculation that Twitter needs to sell itself, they need to find a buyer, they're going to fail, they're going to go bankrupt, because they lose so much money. But I've argued before that I do think Twitter could be a viable, sustainable company if they just right-t-size the cost structure. And we're finally seeing the company do just that. I do think it can survive if it keeps its growth expectations in check, doesn't spend a bunch of money chasing things it can never achieve. Not to say that I think Twitter is going to be a great business worth investing in that will beat the market in the long run, but I do think it's carved out a unique place for itself within social media. And I think they can be a viable stand-alone company and be sustainable. And they've demonstrated that this quarter, mostly through cost-cutting, because as you mentioned, the top line isn't doing a whole lot.

Dylan Lewis: That was basically what I was about to ask you here, Evan. Shares are up 50% in the past month, basically on this news, and the idea that we're seeing them become profitable, maybe this is the turnaround that we've long waited for. It seems like you are not convinced that this is a business worth owning right now.

Niu: No. I've never owned shares, I probably never will. I just don't think Twitter is ever going to be this incredible business that's going to beat the market and really put up these really strong numbers. But, that doesn't mean I think the company is going to fail and go under or necessarily needs to be bought. Of course, there's constant speculation of, so and so wants to buy Twitter. And Twitter has a lot of problems, for sure, on its platform. But I don't have any concerns about them going away or dying.

Lewis: Yeah. I think they're probably here to stay. What keeps me away is, you look at basically what they're valued at now, given this recent run-up, they're at 10 times sales, and that's a company that's not really posting meaningful top-line growth. So, if they're eking out profitability by cost savings, and they have this core user group that really likes the service but they're not growing that meaningfully, it's hard to justify that premium for a business that's not posting big growth.

Niu: Right, exactly. And certainly, it's a relief to see them putting up some decent numbers, and the stock is going up as investor sentiment improves. But at the end of the day, if this is just a one-quarter bump, you have to wait and see how they perform going forward, and can they really consistently put up profits. And even then, it goes back to the question of, are you actually growing the business, are your profits actually growing? And even if they can hit profitability, if those profits are flat, then you probably shouldn't be fetching 10 times sales, or any other good valuation metrics, if you're not actually growing.

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