Social Media Stock Not Living Up to Its Potential

Twitter, Inc. (NYSE:TWTR) is a social media giant based out of San Francisco, California. Later this month, on October 29, the company is aiming to release their most recent quarterly financials and demonstrate an improvement over its incredibly poor revenue reports last quarter. 

Twitter stock on Tuesday scored a five-year high of $47.87. TWTR has done exceptionally well following its massive drop to $20.00 per share in March. The shares are up about 40% year-to-date and more than doubled off those March lows. Despite the company's recent uptrend, many investors still feel that the stock should be worth more than it has been this year. There is no denying that Twitter has not lived up to its potential, especially when compared to its major competitor, Facebook (FB), that has increased its stock price significantly. Does Twitter have time to redeem itself before losing investor confidence completely?

Digging into the financials shows Twitter's market cap is $36.28 billion and its current book value is $9.72 per share. The company has a price-to-book value of 4.60 and a trailing 12-month earnings per share (EPS) of -$1.58. In Twitter's next earnings announcement, the company is expected to report a positive EPS of $0.05.

The company's recent track record with earnings announcements is bleak, falling short of expectations in three of the last four earnings reports. Most recently, Twitter missed earnings by a massive margin of $1.39, reporting earnings of -$1.39 instead of the expected $0.00. Twitter has a forward price-earnings (P/E) ratio of 60.98 and a trailing P/E ratio standing at 21.91.

Twitter has grown its revenue only slightly on an annual basis for the last three years. Between 2016 and 2017, Twitter's revenues actually fell by 3.4%. The company's total expenses have been steadily growing while its revenue growth has been largely inconsistent on a quarterly basis. On the balance sheet, Twitter has $7.77 billion in cash and $4.13 billion in total debt. The company has $12.55 billion in total assets,$4.89 billion in total liabilities, and $7.66 billion in total equity on the balance sheet.

Net income is normally a bright spot for Twitter, with the company's net income growing massively and consistently since 2016. Case in point: Twitter's net income was -$456.87 million in 2016 compared to $1.47 billion in 2019. However, the net income growth streak broke in 2020. The company currently totes a trailing-twelve month net income of -$1.23 billion.

Without much doubt, Twitter stock is currently overvalued. However, that is the exact same sentiment that surrounded stocks like Tesla (TSLA) and Amazon.com (AMZN) before they took off. The major difference here is that Twitter has yet to find a way to turn its product into a resilient and growing business. Tesla and Amazon have both provided ample reasons for their large valuations with their accompanying rate of growth accomplished.

Twitter reportedly has 330 million monthly active users. Even so, the company has struggled to outgrow the approximate $3 billion in total revenue it seems to report every year for the past few years. The lack of revenue growth should raise eyebrows given how incredible the growth of the Twitter platform itself has been.

At this time, it is difficult to see any major growth opportunity for Twitter stock in the near-term. However, the company still has time to change their trajectory. Twitter's balance sheet is a real positive for the company, as the company currently has the ability to pay all of its debt and still have well over $3 billion in cash remaining. Twitter’s strong balance sheet buys the company time to modify its approach and/or business model to boost its stagnant advertising revenue channel. Overall, one will be hard-pressed to conclude, at this time, that Twitter is likely to see an increase in stock price without major business changes that allow the company to improve its revenue growth rate.