Stock Stories, Vol. 2: The Twisting Tale of Twitter

In the common parlance of Wall Street, a "story stock" is one for which the numbers may not have arrived yet, but the narrative has, and it's compelling enough to make investors buy essentially on spec. But from the perspective of Motley Fool co-founder David Gardner, every addition a Foolish investor makes to their portfolio has a story behind it, and on this episode of Rule Breaker Investing, he invites several of our analysts into the studio to share some of their favorites.

In this segment, Matt Argersinger, who works on the Supernova portfolio's Odyssey 1 mission, talks about a stock with a roller-coaster story behind it: Twitter (TWTR). Anyone who has been paying much attention to the market knows that its stock price took major hits as its growth arc plateaued. But we're still in the early chapters of this company's story.

A full transcript follows the video.

This video was recorded on June 6, 2018.

David Gardner: Matt, what is the stock you're presenting for stock story No. 2?

Matt Argersinger: Sure. The stock I'm bringing here today is Twitter, ticker TWTR. I think we all know what Twitter is and what it does. This is a stock we actually bought three times in Odyssey 1 over the years. I believe we're the only Supernova portfolio mission that has recommended Twitter.

Gardner: Excellent. Matt, start us off with once upon a time.

Argersinger: Once upon a time, go back to December 2013, Twitter enters the Supernova universe via your team in Rule Breakers. At the time, the price was $64 a share. It had recently come public after much anticipation, fanfare.

We waited roughly nine months to finally bring it into Odyssey 1. This is August 2014 now. The stock price was $46. We actually added it a month later, again, in September 2014 -- back-to-back months for us, we were excited about the company. I thought it was fun to go back and read some of our write-ups for Twitter at the time.

Gardner: Mm, because, not to foreshadow, but Twitter would drop some from there, wouldn't it?

Argersinger: Yes, it would drop quite a bit. But, if you go back and read some of the things we wrote -- my team and I, this is Aaron Bush, myself, Tim Beyers, and Sarah Goddard -- just to give you a taste: "Twitter is the preeminent real-time communication platform of the future. The active user base of Twitter is accelerating. Revenue growth is growing over 100%. It's the operating system of news, increasingly the way people consume news and information in real-time, and more relevant every day to individuals, corporations, sports teams, celebrities, government agencies, news feeds. And, as Spencer Rascoff of Zillow continuously emphasizes, advertisers follow audience. Twitter's audience is growing by leaps and bounds in an almost unlimited number of verticals."

Gardner: Now, that was pretty awesomely true back then, and some of it is definitely true today. The story may have changed a little bit in the meantime.

Argersinger: It did. You go forward, and really, the timing of that, after our second rec -- so, here's Twitter September 2014 at $52 a share, and it was pretty much downhill from there. Every quarter hence, not only did revenue growth decelerate pretty fast --

Gardner: That was a big thing.

Argersinger: -- the active user base for Twitter, which, at the time, was approaching 300 million, it really flattened out. The active user base went from growing, I'm saying, at 30% year over year, it went down to about 5% year over year, eventually flattening out.

Of course, as you can imagine, this really changed the market's perception of Twitter. It dropped quite precipitously, at one point getting as low as $14 a share.

Gardner: Yeah, I remember that!

Argersinger: That was not a fun time!

Gardner: And when was the bottom, Matt, roughly?

Argersinger: It kind of hit two bottoms. It hit one, that $14-15 bottom, in 2015, and it hit it again later on in, I believe, early 2017. So, two trips to the depths.

But, interestingly enough, we weren't deterred by that. We actually added it a third time in December 2015, so, roughly 15 months after our last rec, specifically because Jack Dorsey, the founder of Twitter, and today the CEO once again, he came back around that time.

Gardner: Kind of like Steve Jobs coming back.

Argersinger: Right. We thought, "Here's the founder coming back," and he did something that we thought was tremendous at the time, he came in and he gave away $200 million of his own worth of his share ownership in Twitter to his employees at Twitter upon coming back. We thought that was an interesting move.

Gardner: One of the bigger gifts that we can think of any CEO ever giving their employees.

Argersinger: Right. And, of course, we were wrong at the time to rerecommend it, because Twitter, again, as we foreshadowed, hit another new low shortly after that. In the fall of 2016, it was interesting, it actually shot up from that low teens to about $25. This was because there was a rash of buyout rumors, if you remember, companies from Salesforce to Disney, there were rumors that they were bidding for the company. It shot up to $25. Of course, a buyout never materialized. The stock fell sharply after that, and slumped down again to that $14-15 range.

But, this is when you, David, and your team, Rule Breakers, in January 25th, 2017, made your second recommendation of Twitter at around $19, which I thought was incredibly prescient at the time. And, of course, it's turned out to be an incredible investment. The reason I thought of Twitter today, or this week specifically, was because it was just announced this week that Twitter's going to be joining the S&P 500.

Gardner: Yes, indeed! Twitter had a very nice day. In fact, the day that it was announced was Monday, I believe. We're taping here on Tuesday, and Twitter's up about 5% or so --

Argersinger: That's right.

Gardner: -- largely on the news, right? Because all the index funds now pile in and need to own some Twitter.

Argersinger: That's correct. It's nearly $40 as we tape, which I think is tremendous. Not only is it more than a double from when you last recommended it in Rule Breakers in January 2017, it's up 60% --

Gardner: Awesome!

Argersinger: -- since our last recommendation in Odyssey 1 about two and a half years ago, and it's actually, as of this week, above our cost basis. Our cost basis was about $38. And for the first time in roughly five years, Twitter is back above our cost basis.

Gardner: That's great. Now, of course, I assume you intend the story to end there, Matt. I'm going to ask you about the lesson in a sec. But, there can be an epilogue here that I want to ask you about, as well, because all that really matters now, of course, is what happens going forward. First, Matt, what's the lesson?

Argersinger: I think the lesson is, Twitter hasn't been a great investment. It's one of those investments, when we looked at it at the time, it had just recently gone public. The hype around the platform and how it was growing was tremendous. It looked like it was going to have the same kind of trajectory as, say, Facebook, in terms of advertising growth, user growth. There was all this excitement. It didn't materialize.

But, never at any point, I think, in the last five years has the influence of Twitter declined at all. In fact, I think that today, all those things we said joyously several years ago are actually coming true. I do think it's becoming that No. 1 source for most people to go when they want real-time news or real-time communication with a lot of different outlets.

So, I think, we were wrong, maybe, with our timing, as often investors are. But I think, actually, all those original stories we had are coming true, and the evolution of Jack Dorsey coming back, making the platform more interesting, connecting it to a lot of different things that we find more relevant -- sports, for example, for Twitter has become a very popular vertical.

So, not a great investment. The story, I feel like we had it right, and I think it's just starting to play out now.

Gardner: It's funny to think that each time your team bought, Matt, it dropped from there after you did. And yet, even though you might feel like, strike one, strike two, and strike three, you're now back to even-slash-maybe even a little bit above where you started, and that itself is instructive.

Argersinger: That's right.

Gardner: Do you like Twitter going forward?

Argersinger: I do like Twitter quite a bit going forward. Maybe it's just mostly anecdotal right now, but I feel like, especially with, maybe not so much the Facebook fallout, and it's not really fallout we're talking about, but maybe, with Facebook focusing more inwards and more on things like friends and family, relationships, I feel like there's a big opportunity for Twitter to really now dominate the "news feed" for most people, especially as they interact with the rest of the world in real-time. So, I think I'm as excited about Twitter as I've ever been. And I think the business of Twitter, especially when it comes to advertisers and ad revenue and things like that, is really going to start reflecting that pretty soon.