Twitter shares need new lease of Digital Life

What’s Jack Dorsey’s plan?

Beyond somehow getting enough sleep whilst working simultaneously as CEO of two listed high-profile tech companies in trouble. (The other is Square Inc.)

Investors have streamed out from the best-known company run by @Jack, Twitter, as it faced a seemingly relentless storm of troubles over the last year.

• User growth – Q3 +11% to 320m, seen static in Q4
• Ad revenue (90% of total) – Q3- $569m +58%, but slower vs. Q2
• Management -  after the departure rate of senior executives quickened last month, the list of key hires required has been extended
• Product: poor traction / user criticism of ‘moments’, Periscope, curated timeline algo
• How to become a bigger piece of global Digital Life – move out of its narrow scope
• Part-time CEO – does Dorsey sleep?
• How can major decisions be made under pressure and whilst fire fighting?

Another main theme surrounding Twitter has been takeover talk.

This isn’t new.

But it has intensified as the shares have ground ever lower—(latest all time low was yesterday at $12.32).

Google is a mainstay for this type of uncorroborated speculation.

News Corp. is a relatively recent addition.

Our view remains that Twitter would be a whole bag of trouble for almost any acquirer due to its uniqueness and narrow scope for transference of its utilities.

Our discounted cash flow analysis on Twitter last summer suggested its true net asset value was just $5.5 a share.

As revenues and user growth ground to a halt, the stock fell as much as 50% since our piece, almost to the vicinity of our rather harsh call.

This suggests any buyer would be foolish to do so whilst the stock was above Twitter’s current net asset value.

 What to watch for Q4 results

 The main pivot point has to be monthly active users (MAU).

The crucial MAU metric has been becoming more and more concerning, since at least Q2 2015.

The count then was 316 million, 15% higher year-on-year, but stagnating vs. Q1 against which the rise was just 3%.

It was Twitter’s slowest MAU growth since its stock was floated.

MAUs rose a faster 11% in Q3 to 320m. But they’re again seen static in Q4.

Any sort of come-back by users or by Twitter in re-defining market expectations by presenting alternative possibilities for growth would work wonders for TWTR.

MAU must move (forward)

MAU leads directly to advertising revenue. This was 3% slower quarter-on-quarter last time.

However one glimmer of light here is monetisation. Twitter has been more aggressive in cashing in on users than Facebook has dared, though in absolute terms the net outcome has not of course boosted Twitter’s earnings faster.

Still monetisation remains an area Twitter execs might push tonight.

If they sound convincing, that could help the shares.

Hire orders

Senior management—see above. Twitter has a new CMO, but not much else.

There’s persistent talk of a ‘media star’ boardroom hire. Either way, it’s the elongated hiring process and lack of clarity thereof which has been damaging.

Again, Twitter needs to be seen bolstering its board and filling the empty VP seats.

These people are needed in perception and in fact.

Here are the main financials the market is expecting

•  Q4 profit – 12 cents – flat Y/Y
• Q4 rev – $709.9m -+48%
• Q4 guidance was $695-$710m
• FY 2016 – revenues  seen $3.1bn / adj. profit 55 cents

From a technical perspective, naturally the stock faces severe challenges.

It has formed a distinct channel since October last year which will constrain recovery unless broken.

Among similar(ish) technology companies—Yahoo!, LinkedIn, Amazon, Facebook, all of which are bigger than Twitter, TWTR’s 90-day volatility—AKA beta is actually quite average.

That in theory limits Twitter’s ability to jump or fall faster than the market, though it doesn’t limit how far it can rise, or fall in the longer term.

Therefore chances of the stock breaking out of its channel aggressively above probable resistance c. $21 look slim, even in the event of a positive surprise on Wednesday evening.

The price is close to the 50-day MA – red, 61.8% extension of fall from October at $20.98, and was 2015 low.

DAILY CHART

Please click image to enlarge

This article will be updated after Twitter’s Q4 results have been released.