But has Twitter lost its relevancy? Has its business model lost its appeal with advertisers, and does all this mean its stock is now expensive? It's not easy to answer "yes" to any of these questions.
This stock is now unquestionably cheap and Twitter will bounce back. As RealMoney's Doug Kass writes, "to me, Twitter has a long runway for growth despite the recent short term hiccup in sales, cash flow and profits which predominantly stemmed from operating 'bugs' (and poor execution)."
Unimpressive Revenue Growth
CEO Jack Dorsey, who is also CEO of Square (SQ) - Get Report , declared to investors that Q3 2019's revenue growth was ''painful'' but given the work that Twitter has put in over the past one to two years, its troubles are ''no longer existential.''
Further, Dorsey was quick to reassure investors that Twitter is more robust today than it has been in the past and that the company is now able to hire previously out-of-reach talent.
Nonetheless, the miss on the top line in Q3 2019 together with the unimpressive growth prospects for Q4 2019 was too much for a stock that had rallied significantly throughout 2019, and consequently, Twitter was met with a strong sell-off of 20%.
The news of its continuous growth in monetizable DAUs (daily active usage) has received very little focus over the past several days. Yet, this is vital to Twitter's business model and the ultimate thesis here. Twitter has seen four consecutive quarters of growth.
If Twitter can continue to resonate with audiences, and even go so far as to grow its monetizable audience, then the stock presents investors with a strong buying opportunity.
Twitter finished Q3 2019 with close to $4 billion of net cash (once we net out its $1.8 billion debt convertible). And rather than squander its war chest, Dorsey and his team are staying focused on their quest for organic growth.
When asked on the call, Dorsey notes that Twitter has no desire to deploy its healthy balance sheet for acquiring other companies. For now, Twitter believes it can continue to grow organically and has plenty of runway for improving its ad formats and products.
Moreover, what's particularly noteworthy about Twitter is that unlike many other social media platforms, Twitter is not only highly cash generative but it is capable of generating more than $1 billion of free cash flow in a single year.
Valuation - Large Margin Of Safety
The table above notes the discrepancy between ''old'' social media such as Twitter and Facebook (FB) - Get Report whose investors are skeptical over their growth prospects, versus the ''new'' platforms such as Snap (SNAP) - Get Report and Pinterest (PINS) - Get Report .
The old platforms are growing slightly slower but are available for bargain prices, particularly when we consider just how much free cash flow they are capable of generating. Conversely, the new social media platforms, are presently priced for perfection and more.
There is no question that next quarter's guidance is less than investors had hoped for. At the same time, readers should bear in mind that Twitter is more relevant and entrenched today than it has been over its lifetime.
The Bottom Line
Dorsey is consistent on Twitter's vision -- to get more of the world to use Twitter. Short-term investors are unenthused over Twitter's near-term prospects, but Twitter is not going away, and its very capable management is backed by a rock-solid balance sheet.
Twitter's risk-reward balance is very positive. Growing social media platforms, capable of generating GAAP profits and strong cash flows don't come cheaply. A rare opportunity is now available.
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