The following commentary was originally sent to Action Alerts PLUSsubscribers on July 26, 2016, at 5:19 p.m. ET.
Within the second quarter, earnings per share of 13 cents came in above consensus expectations of 9 cents, but revenues of $602 million fell slightly short of the $607 million consensus estimate. The selloff is likely triggered by severely disappointing third-quarter sales guidance of $600 million at the midpoint, which falls a full $80 million (or 12%) below consensus.
Twitter is part of TheStreet's Action Alerts PLUS portfolio.
We reiterate our Three rating on Twitter, and continue to advise members -- new and existing -- not to purchase shares, which represent less than 0.5% of our portfolio. (We sold all but a sliver of our position over a year ago in the high $30s). Twitter has been the last-ranked stock within our indices since the system's March inception.
We believe the company is well on its way to spiraling out of control, and view its inability to engage users, monetize content or suppress executive turnover as reasons to avoid an investment in the name at all costs.
As for the results, we view the immediate reaction as unsurprising and justified given the stock's remarkable run of about 30% in recent weeks, sparked almost entirely by takeover speculation following Microsoft's (MSFT) - Get Report acquisition of LinkedIn (LNKD) .
As we have always said, we believe it is important not to get sucked into merger speculation for Twitter in the absence of a tangible offer or substantiated deal conversations.
While we have long touted the platform's unlocked potential, and agree that many outside parties likely see the same possibilities, the company remains in disarray as it loses prominent members of its product team, struggles with user engagement and works to shift its strategy toward video.
Ultimately, the murky situation that a buyer would have to inherit, address and ultimately fix, in our view, simply would require the substantial time and resources that many larger companies are not willing to waste.
Specifically onto the quarter, Twitter actually surprised to the upside on user growth, increasing monthly active users by 3% year over year to 313 million, which was 1 million better than the Street's expectations. The better-than-expected result was due to increased engagement in the United States.
Importantly, management noted that this is the first quarter the platform actually saw a meaningful turnaround in the trend of user engagement, largely due to the impact of the several product changes made over the past year.
Digging deeper into sales, advertising revenue was worse than expected, coming in at $535 million for the quarter vs. consensus of $540 million. Management specifically highlighted "less overall advertiser demand than expected" as a reason for the shortfall.
While marketers are increasing their interests in video advertising, they aren't increasing their overall advertising budgets as they wait for concrete results on ad impressions and conversions.
Management did highlight its recent live-streaming deals, however, as reason to be encouraged for the long term. Brands like Anheuser-Busch InBev, Nestlé, Sony Pictures and Verizon are just a few of the marketers who have expressed interest in Twitter's new live-streaming content (which includes the NFL, NBA and Bloomberg TV).
All in, we find it difficult to value any of the positives from the quarter (potential MAU inflection point, streaming advertising interest, etc.) given the company's history for disappointment and its current, in-flux strategy and operations.
Although there are certainly some encouraging data points and commentary for the long term, we still need to see some stabilization in the company's results and discipline in its operational execution before we accept a turnaround story.
At the time of publication, Jim Cramer's charitable trust Action Alerts PLUS held no positions in stocks mentioned.