What Twitter’s Insider Buys Really Tell You

Keith Fitz-Gerald Aug 14, 2015
19 

I committed the equivalent of financial heresy in late December 2013 and again in January 2015 when I said Twitter (NYSE:TWTR) was a bug in search of a windshield and recommended shorting the stock. The blogosphere went nuts and I was taken to task by Twitter-lievers.

Since then the stock has fallen 63.31% from a high of $74.73 to a low of $27.04. It’s rebounded slightly in recent trading and the rally cry has begun anew…

…Twitter Interim CEO Dorsey Buys More Shares In Show of Faith – Reuters

…Twitter Rebounds: Here’s Why You Should Be Buying Shares – Bloomberg

…Jack Dorsey and Other Twitter Insiders Make Show of Support – The New York Times

Don’t buy it for a New York minute.

The company still has serious problems, and the narrative you’re hearing is intended to do one thing and one thing only… separate you from your money.

We’re going to talk about that today because knowing what not to buy is every bit as important a Total Wealth Tactic as knowing what to buy.

Here’s why Twitter stock is still a disaster waiting to happen.

The narrative is certainly alluring, and I don’t blame you if you’re tempted. That’s what “they” want.

And who, exactly, are “they?”

Wall Street’s investment bankers, venture capitalists, early investors, and legions of analysts who have slapped “buy” ratings on the stock because of the company’s potential.

At the risk of sounding like a broken record, you and I have talked a lot about this and why it’s so dangerous. If you’ve just joined us, here’s the CliffsNotes version.

Potential doesn’t equate to profits but, rather, a much more dangerous element – hopium – as in you “hope” that the stock goes up so another more gullible investor pays more than you did at some point in the future.

“Hopium” is the core of any Twitter bull’s argument – and that’s why it’s still a terrible investment.

Four Reasons This Classic Short Is Still a Sinking Ship

First, Twitter’s still struggling to acquire users. More than a billion people have tried the service and subsequently abandoned their accounts according to venture capitalist Chris Sacca. Only 139 million users among Twitter’s 316 million total users logged in all quarter. That’s only 44% of the total user base… less than half. Facebook, to put this in perspective, logged in 100 million daily users over the same time frame.

Second, those who stay simply aren’t engaging. The numbers are so bad, in fact, that Twitter stopped reporting the most critical metric – timeline views per user.Β  That was a “feature” that was supposed to encourage engagement and have a meaningful impact on increasing the number of users. Oops.

Third, there’s a revolving C-Suite with critical defections left and right. The CEO’s seat is vacant and the company is experiencing a brain drain as it loses talented programmers and corporate leaders to more sure-footed rivals like Google. Rishi Garg, Twitter’s vice president of corporate development, is the latest big fish to leave last month, for example.

And fourth, it’s hard to tell if the remaining executives are drinking their own Kool-Aid or are simply naΓ―ve. I say that because CFO Anthony Noto recently remarked that daily users just aren’t a priority, but that the company will do a better job considering them… in 2016??!!

Unbelievably, the Twitterazzi are unfazed.

Interim CEO Jack Dorsey just bought 31,267 shares, “and he’s an insider,” they gush. The implication is that he wouldn’t have made such a move unless he were certain the stock was going higher.

In the old days, that was true. Insiders bought because they believed in their company for the long haul. These days, it’s a different story.

Not only is the $875,000 stock purchase negligible compared to Dorsey’s overall fortune, but Dorsey already owned 22 million shares of Twitter stock. In other words, he increased his ownership of the company by a mere 0.14%.

#Whoopdedoo!

Dorsey’s purchase is a rounding error when you consider that he and a handful of insiders made more than $50 million selling Twitter stock in 2014. What nobody’s considered is that Dorsey could conceivably be setting up another liquidity event down the line… a tax loss to offset earlier gains.

To be clear, I’m not saying Dorsey’s out to wreck the company by any stretch of the imagination. What I am suggesting is that he, like many other wealthy individuals faced with ginormous tax bills, may be making his buy with the intention of boosting his after-tax returns through opportunistic tax loss harvesting if and when Twitter tanks.

Then there’s the NFL deal.

The Twitter faithful are thrilled that the NFL just signed up. In reality, it’s an extension of a deal first inked in 2013, so this isn’t new news even though the media lit it up this way.

The plan is that Twitter uses NFL content to create an online community around huge, popular and controversial events… like football games. It’s a plan Twitter calls Project Lightning.

I think it’s more like a “Hail Mary” – meaning a play you run only as an act of desperation when you need a long gain or risk losing the game. That’s because the NFL also has deals with Facebook and YouTube among other media outlets. Twitter is not an exclusive.

Which brings me back to the users.

No online service can survive without a growing, actively involved user base. Remember MySpace? Friendster? Digg? Eons? All gone.

Human nature and the psychology of online identity management eventually killed ’em, just as they’re killing Twitter. That’s because every user reaches a point where they think twice about posting personal details, jokes, and liking stuff because they’re worried about what others think.

Case in point, Twitter has become widely known for “trolling,” the Internet practice of making deliberately offensive or provocative comments with the goal of eliciting a response from the targeted individual.

From there it’s a downward spiral… users update their status less frequently, check in occasionally for a while, then not at all.

Twitter’s Trajectory Is Typical for Hype Stocks

Once upon a time, companies justified Initial Public Offerings (IPOs) with a track record of success and proven financial data. These days, it’s all about “potential” – which is really Wall Street-speak for the “last guy to buy gets left holding the bag.”

I argued as much in the fall of 2013, when the stock was preparing to go public at $26/share. And while Wall Street’s fabled hype machine managed to give the stock a lift right out of the gate, it’s since crashed back down to earth at $29/share. That means investors who bought the IPO and held it through every up and down have seen profits of less than 10% in almost two years while the S&P 500 returned more than 18% in the same time frame.

There’s no question that TWTR has had a puny return compared with the broader markets. It’s always been an incredibly volatile stock, tanking as much as 24% after earnings reports.

That volatility, by the way, is typical of hype stocks. They’re built on unrealistic promises, and when those promises don’t pan out, the stock suffers which is, again, why you don’t want to be the last investor to the proverbial party.

Twitter’s User Growth Is Even Worse Than It Looks

In Q2/2015, TWTR reported 316 million monthly active users, up 15% year-over-year. That’s anemic growth compared to other social media giants any way you slice it – but the story is even more damning than it appears on the surface.

In April, Twitter’s CFO Anthony Noto made a truly ludicrous announcement. When it came to determining the numbers of monthly users, TWTR would now include what they call “SMS fast followers” – people who access Twitter only through the occasional text message.

It’s a transparent attempt to artificially pump up user numbers, the metric for which Twitter is under the most pressure to show results. Exclude these SMS users, and Twitter’s monthly users tally is actually down 2% from last quarter.

Facebook, on the other hand, grew its total monthly users by 17% year over year last quarter netting another 173 million active users in the process. Further, Facebook reports those numbers without gimmicks.

And finally, Twitter’s trading at a forward PE of 45.25 times projected earnings as of December 31, 2016. That’s in the nosebleed section when it comes to being an expensive stock, no matter how much “potential” the company has.

Until next time,


Keith Fitz-Gerald

19 Responses to What Twitter’s Insider Buys Really Tell You

  1. Larry says:

    Thank you for the valued insight!

  2. SS says:

    Just because you don’t like it or use Twitter doesn’t mean it is doomed. Facebook has its own list of issues but it’s a market darling that nobody questions. There are more than enough negative comments on it. I find Twitter is the much more useful and engaging platform. They just need to figure out how to get that across.

    • Keith says:

      Hi SS.

      Your points are well taken and spot on. The problem is that Twitter cannot seem to do what you’re suggesting and that’s where I think the Company breaks down.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  3. Gary says:

    Very interesting commentary, should I be selling puts?

    • Keith says:

      Hi Gary.

      That depends on your objectives…selling cash secured puts to buy low, for example or some sort of synthetic position. Otherwise, I’d be thinking about buying ’em.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  4. Jim Koch says:

    Keith,

    Great insight! If this doesn’t scare off traders, nothing will.

    • Keith says:

      Hello Jim.

      Thank you for the kind words. We will certainly see…but the markets can remain illogical longer than they can remain solvent. Ultimately, there will be a great buying opportunity here when the smoke settles but whether that’s for individuals or a corporate suitor remains to be seen.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  5. John Chaves says:

    The negative spiral comment above is so true. Humans are an emotional creature and respond negatively to criticism by withdrawing from the social interaction. Also, Twitter being text based requires a lot of effort to describe a scene or situation, whereas in FB a picture is worth a thousand words. How many tweets in a thousand words?… about 7 or so strung together…too much work for me and a lot of other humans.

    • Keith says:

      Hello John.

      That’s an excellent point and one I had not considered…the context of a picture. But, then again, I’m old school…give me an emoji.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  6. Esnider says:

    Remember the initial investors who bought Facebook and sold it when it went down horrendously they didn’t hold it did they they learned from people such as the ones who write these derogatory comments and don’t see the value there is in a company that has great potential

    • dbtheonly says:

      But isn’t that the very question?

      Does Twitter have “great potential”? And if so, will they be able to turn it into actual profit?

      Without positive answers to both questions, there’s no need to sink money into the company.

    • Keith says:

      Hi Esnider.

      You raise an important point…and that’s what makes this business so great. Perception may be the difference in perspective just as easily as it can be the difference in timing or even price. That’s why risk control is so very important…just in case.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  7. John R Stockhausen says:

    RE: Keith Fitz-Gerald, As always, thanks so much for all of your Emails you send me. It’s really appreciated more than you know.
    First, Do you think China’s Stock market will CRASH????
    Now, if China’s market does crash along with Greece & the U.S. Stock market, is there any one (Inverse ETF I could use to take advantage of these crashes or will I need to use more than one Inverse ETF????
    This information is greatly appreciated.
    Again, thanks for all you do.
    Sincerely, John R Stockhausen

  8. Amanda says:

    Twitter is still very popular and I am sure facebook or google would be very happy to acquire it for 25 billions. Selling now would be a huge mistake. Yes facebook is better but facebook market cap is more than ten times higher…

  9. Eric says:

    I think Twitter is nonsense and I have NEVER used it one time…..If you are a 13 year old girl I guess it may be okay.

  10. cart66 says:

    Seriously, ?
    Derogatory comments about the use of Twitter is really unfounded.
    Twitter has its place in long term social media and uses.
    It has uses Facebook can’t touch!!
    A unimaginable audience can be reached instantly!
    From a marketing perspective, that’s the future of teitter.

  11. Dave says:

    I would only add that they not only have never made money in seven years and show no likelihood of making any money.

  12. Amber Petrovich says:

    Here’s why I can’t see Twitter fading into nothing. It might remain unprofitable, yes, if they don’t find a CEO.
    But it’s not going anywhere and here’s why:
    Today it remains the primary voice of Famous People: politicians, celebs, athletes, pundits, writers, comedians — they all use Twitter, there’s no cap on how many followers they can have and the media quote their tweets all the time. Which leads me to my next point:
    Twitter is PUBLIC. Completely different from FB or whatever came before it. And whether your timeline caters to celeb, sports, culture or world news, Twitter is where you’ll get the scoop and probably before any other site does.

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