Does Twitter Have a Second Act?

It was bad enough that Twitter (TWTR) released a disappointing set of third-quarter numbers, but what investors probably liked even less was the indication that matters won't get better at the social media company before next summer at the earliest. The market expressed its displeasure by taking back nearly all of its 2019 share price gains. In this segment of the Oct. 25th Motley Fool Money podcast, host Chris Hill and Motley Fool senior analysts Jason Moser and Emily Flippen talk about where the problems lie for Twitter, its advertising revenue, its investment thesis, and what its next act might be.

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This video was recorded on Oct. 25, 2019.

Chris Hill: Shares of Twitter down more than 20% this week after disappointing third-quarter results. Jason, Twitter's management basic came out and said, "Don't expect things to get any better in the next three to six months." That's how I interpreted what they said.

Jason Moser: Well, yeah, it was close to that. Technically, it's still been a decent enough year for the stock, even after the sell-off. The reaction was a double whammy of a stock that was clearly overvalued, now that we know it was based on an incorrect set of assumptions, and then missing all of those different expectations. The market's never going to receive that very well.

My question with Twitter, and this is becoming more and more a concern for me quarter in and quarter out, is what's the next act for these guys? We know what they do, and we know how they make their money. This is an ad play at this point. But what's next? What are they trying to do? They tried to make investments in video and entertainment. For all of its problems, you can look at something like Snap, for example, and say, well, augmented reality, that is their NorthStar, that's what's next for them, whether they can pull it off is another question entirely. What is next for Twitter? I don't know yet. I don't think many of us do. And that's becoming a problem.

On the user side, they're doing OK. They grow users, they're engaging. But to your point there about going into the following year here with some problems still, there was noteworthy language in the letter. In one paragraph, they talked about the successes in product improvements. In the very next paragraph, they talk about all of these challenges and profit issues. They sort of conflicted with one another. I think it's all boiling down to a decent user experience, but they had some bugs in the system that were not helping them utilize their advertising technology very well. That results in less return on the advertising. And that's a problem for Twitter because it's just an advertising play.

I think, until they can answer that question, what's next, we likely see Twitter trade in this range. At least now, there's a fundamental business that underlies everything, we can value the stock. But until they answer that question, it's hard to understand why it goes to that next level.

Hill: And it's a good point because there are different businesses that we look at from time to time, and we see companies making investments, and when they don't pay off in the first couple of years, we start to ask, "Well, should they still keep throwing money at that?" As you mentioned, Twitter made a pretty decent investment into Periscope and video. It seemed like maybe that was the next big thing for them. Maybe we give them partial credit for stopping that. But at the end of the day, as you said, we're left with this business that seems to be doing just fine, but that's all that it's doing, is just fine. Unless they come up with a second act, it's hard to make the case that this is a stock worth buying.

Moser: Yeah. At the right price, probably everything's worth a look. But to the video point, yeah, that was the buzzword for a long time. It's not to say that they've just cut off video. They've done good things with video. It's created more engagement. That's ultimately what you need for platforms like this. But yeah, I wonder, maybe we've seen the heyday for social here. It seems like these companies are coming under a lot of scrutiny. We're asking that question, is the world better off with them or without them? It seemed, early on, it was clearly better with. Now, I think we could sit here and debate this one all day long. I'm not so sure the world is better off with all of these social companies. It seems to ruffle a lot of feathers. But, hey!

Emily Flippen: At the same time, the reason why we're seeing them come under pressure is because they're so pervasive, and they're so popular. So, it causes us to have conversations about what that means in terms of data, privacy, protection, security, all of these conversations that we didn't have to have before. Sure, they're hard conversations, but they're necessary conversations, because these products have increased transparency. And to the extent that we hate things like Facebook and Twitter, the world's a lot more accessible today than it was 10 years ago. There's something to be said for being a pervasive platform that increases accessibility, responsibility, and transparency.

Moser: Yep. Just because we know something's bad for us doesn't mean we're not going to do it. The world's still full of hundreds of millions of smokers.

Hill: Last thing and then we'll move on. You mentioned Snap. Are you surprised at all at the rise of Snap over the past year or so? It's now at the point where Snap's market cap is only a few billion dollars lower than Twitter's.

Moser: I don't know that I would say surprised. I think they still have a lot to prove in actually becoming a fundamentally sound and sustainable business. But Spiegel talks a pretty good game. I think he's starting to learn, at least, how to run a public company. It's also coming off of a very low base.