With just shy of $4 billion under management, Brookside Capital prides itself on taking a long-term, "Social, Economic and Political" perspective when assessing potential investments. Brookside's emphasis on determining a stock's long-term potential was likely a key to its decision to drastically reduce its Twitter (TWTR +0.00%) holdings in the recently completed third quarter.
Twitter CEO Dick Costolo spent much of his time at the recently completed inaugural analyst day addressing the concerns of investors like Brookside, including slow monthly average user, or MAU, growth, engagement challenges, and making it easier for new users to start tweeting. Though Brookside's decision to decrease its stake in Twitter from 3.6 million shares in Q2 to under 2.4 million in 2014's third quarter was made before Costolo laid out his grand plans, nothing's changed that would warrant any misgivings for shedding 1.2 million shares.
The song remains the same
Concerns surrounding Twitter's valuation have been swirling from day one following the 73% jump from its initial public offering share price of $26. But, like any good momentum stock, Twitter's share price has continued to bounce around at sky-high levels. Even though Twitter's stock price is down over 37% year-to-date, valuation concerns remain: which speaks volumes in and of itself. With a forward price-to-earnings ratio over 122, even accounting for 2014's poor stock performance, Twitter is still expensive.
For long-term investors like Brookside Capital, it's no wonder the decision was made to shed such a large piece of its ownership stake in Twitter. And unfortunately for tweet fans, Costolo's plans to "fix" Twitter's many problems as detailed at its analyst day aren't enough to address its on-going challenges.
Based on its valuation, Twitter should be growing at a nearly unprecedented rate, but it's not. The 13 million new MAUs it garnered in 2014's Q3 -- raising its total to 284 million -- was nice, but hardly earth-shattering. Costolo admitted as much at the analyst day, which is why he took the wraps off Twitter's new "instant timeline" to, as he put it, "reduce barriers to consumption."
The "barriers" Costolo refers to are significant, as demonstrated by the 500 million visitors to Twitter that opt to not sign-in, assuming they're one of the many who have a Twitter account but don't use it, or are simply dropping by for a peek. The fact that most everyone on the planet has heard of Twitter -- you can't watch a sports or entertainment show without seeing a celebrity's recent tweet -- but its MAU growth remains so anemic is telling, to say the least.
More grand plans
Taking steps to make it easier to enroll new tweeters isn't all Twitter is doing to try and address investor's angst. Like social media king Facebook (FB +0.33%), Twitter recognizes the online world, especially the mobile population, is moving to video. Toward that end, Costolo plans to incorporate video into the Twitter experience in an effort to keep users engaged. Of course, the hope is that video will not only keep folks tweeting longer, and more often, it should boost ad revenues, too.
Fair or not, Facebook is the behemoth most often compared to Twitter. In fact, Costolo alluded to Twitter's objective of boosting its MAUs up to a billion, ala Facebook, though he didn't mention the social media king specifically, during his analyst presentation. Of course, as it stands, Facebook's 1.35 billion MAUs, WhatsApp's 700 million, and Messenger's 500 million already dwarf Twitter's 284 million MAUs. And don't be surprised to see Facebook's Instagram property surpass Twitter's MAUs before long.
Making it easier for new users to sign-up, implementing video as an integral part of the experience, and turning at least some of those 500 million visitors into MAUs are more than noble efforts: they're necessities if Twitter is ever going to warrant its ridiculous valuation. With that said, there's little doubt investors will see Twitter's stock price jump at some point, whether there is any fundamental basis for it or not, because that's what momentum stocks do.
And money managers like Brookside Capital will still enjoy some of Twitter's momentum-based gains -- it didn't completely jump off the Twitter bandwagon, after all. But as investors big and small have made clear by pushing Twitter's stock price down over 37% so far this year, it needs to stop talking and start implementing.
