What Insider Buying of Twitter Stock Really Tells You (NYSE: TWTR)

I committed the equivalent of financial heresy in late December 2013 and again in January 2015 when I said Twitter Inc. (NYSE: TWTR) was a bug in search of a windshield and recommended shorting Twitter 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

0715_TwittersMonthlyDon'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 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 to think "why are insiders buying Twitter stock now?"

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 here is why it's still a terrible investment...

Four Reasons Twitter Stock 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 Inc. (Nasdaq: FB), to put this in perspective, logged in 100 million daily users over the same time frame.

Second, for social media companies, engagement is critical. And those who actually stay on Twitter simply aren't engaging. The numbers are so bad, in fact, that Twitter stopped reporting the most critical metric - timeline views per user. 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 naïve. 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%.


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 shares tank.

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 Stock'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 a 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 a 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 Twitter shares have 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 ratio of 45.25 times projected earnings as of Dec. 31, 2016. That's in the nosebleed section when it comes to being an expensive stock, no matter how much "potential" the company has.

Profit from Volatility: Markets have been getting very volatile over the past few days. And every time this happens, fickle investors get scared and run for the hills. This shakes the "weak money" out - and that means more profit potential for you. Here's how to maximize it...

About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

Read full bio