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Twitter Inc. (NASDAQ: TWTR) reported earnings last week, and the market has been less than enthusiastic about the results. The stock is down almost 20% with analysts lukewarm about the numbers and guidance from the company.
Twitter stock is one of the few social media and tech stocks that is struggling recently. You notice this more easily when comparing Twitter to other social media companies like Facebook Inc. (NASDAQ: FB) having a monster year.
Facebook popped 7% after its 2021 earnings report.
However, remember that Mr. Market likes to exaggerate these kinds of differences.
Here is why Twitter stock is really lagging behind Big Tech - and what to expect from the stock later in the year.
Insider Info on Twitter Stock
If you want to know how a company is really doing, it's best to get it straight from the horse's mouth.
CFO Ned Sega said during an interview that he expects earnings to grow at a single-digit pace for the rest of the year. Sega also suggested that the weakest quarter would be Q2, with revenue flat compared to Q1.
The ongoing hiring binge would lead to an increase in compensation costs of as much as 25% in 2020.
Analysts have compared the report to blowout quarters from other social media companies so far this year. Twitter has not gotten the advertising growth and increase in users that Facebook Inc. (NADSAQ: FB) and other Big Tech platforms have seen in 2021.
The report was not horrific by any stretch of the imagination. Revenue had increased by 21% year over year, and ad revenue was up 32%. While that was above the consensus estimate, management's guidance for the rest of the year scared off investors.
The market is currently paying for roses and sunshine, not weak growth.
Twitter shares are down because, like most social media stocks, the shares were priced for perfection before the earnings report. When your stock is trading at 50 times what analysts are hoping you will make next year and 14 times sales, you do not have the luxury of reporting anything less than perfection.
At that valuation, beating the analyst's estimates for profits and revenue growth is the minimum expectation. Investors and traders buying in at that price expect to hear upbeat forecasts and increasing guidance. Anything short of perfection will lead to aggressive selling, and that is what happened to Twitter last week.
The report was not bad. It just wasn't perfect.
But is that enough reason to buy Twitter stock on a dip?
You'll find varying opinions on this. Here is what we think.
Should You Buy Twitter Stock on the Dip?
One of the bright spots for Twitter is the success of its audio product, Spaces. Since Spaces was rolled out recently to any Twitter user with more than 600 followers, downloads of its largest competitor, Clubhouse, have declined substantially.
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Spaces has also rolled out its android product before Clubhouse, which remains available on just Apple Inc. (NASDAQ: AAPL) operating systems.
Elliott Investment Management is said to be buying the stock on the recent dip. The firm has a seat on the Twitter board and had accumulated a stake reported to be worth about $1.6 billion.
The rumors floating around Wall Street this week say the firm, headed by billionaire activist Paul Singer, has bought as much as $200 million on the dip and was still buying this week.
Should we follow Mr. Singer's lead and begin buying Twitter at these levels?
Probably not right now, if you are a long-term investor. Since the Fed opened the fiscal spigots last year, social media and tech stocks have been a momentum trade. With last week's selling, momentum appears to have turned negative.
Twitter is still priced for near perfection, and there are way too many questions about user growth and monetization of the user base to justify the current valuation.
Aggressive traders could consider making a bet that Twitter will bounce off the 200-day moving average at around $51.70 and bounces toward $65 to fill the gap. Use a very tight stop as a break below the 200-day could attract a wave of additional selling.
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