Twitter's Stock Needs One Thing to Happen to Go Higher
Posted at 7:16 a.m. EDT on Wednesday, June 17, 2015
If you build it, they will come, but maybe they won't stay.
That's the Twitter (TWTR) twist on Field of Dreams, because one billion people have tried Twitter and it looks like -- we can't be sure -- only about half have stuck around. When you add in that new user growth has stalled, you recognize that this company may be on a trajectory to have net fewer users this year than last.
And that's the crux of the problem.
I have been noodling on this issue ever since the company did something with CEO Dick Costolo and chairman Jack Dorsey last week - frankly, I am not sure what -- to bless the continuity of that trajectory with straight faces all around.
My confusion here -- why I say, did "something" -- stems from the disastrous interview Costolo and Dorsey had last week with CNBC, the interview that suppressed the stock of Twitter even more than had been the case the night before.
So let's go back in time and focus on what happened here.
First, we got a somewhat jumbled and confuse statement out of Twitter about Costolo being out as CEO. That caused the stock to immediately shoot up 13%. That's the correct reaction, because it had become obvious to any large institutional holder -- not Twitter follower, but large holder -- that the downward trajectory of users was unacceptable.
Ever since then, it's all been bad.
I mean, immediately bad. Because within seconds of reading that Costolo was out, we learned that Jack Dorsey was to become interim CEO beginning July 1.
What's so wrong with that? First, the fact that the change doesn't occur until July 1 meant that the board saw no real urgency to the situation.
Second, the idea of putting in Jack Dorsey as interim CEO could not have been more baffling. Dorsey clearly wants the job, but he's running Square, which is expected to come public shortly. What does he think he can do, run two companies at once? That's what he's going to be tasked with, and there is no way that's acceptable with either the large shareholders or the SEC, for that matter.
Worst possible choice.
When that news is digested, the stock's only up 8%.
Then instantly we learn that Dorsey is happy to have Costolo stick around on the board, because the company, he says, has terrific momentum and a great new product.
Now the stock's up about a buck.
And, even better, the exact strategy will be kept in place by Dorsey.
What strategy? The one that has a shrinking user base?
Now the stock's up 38 cents.
And that's where it settled at the end of the evening.
The next morning, David Faber begin the questioning of Dorsey WITH, emphasis on WITH, Costolo. First thing you have to ask is, what the heck is Costolo there for? He's clearly OUT. Or is he OUT? If he is there, isn't he in? Second, almost every question is answered the same way by both gentlemen: the team is healthy and the product cadence is excellent. In fact, repeatedly these two talk about product cadence.
The problems at Twitter, though, as we all know, have nothing to do with product cadence whatsoever. They have to do with user and advertising disenchantment. They have to do with poor execution. They have to do with something that's promoted by everyone famous who uses it, every celebrity, yet Twitter can't harness that or keep people from being disaffected.
Now the stock's down a buck.
And it stays down, until there are rumors of activists circling.
To which I say, they should be. When you have the ousted CEO still running the place with a new CEO who is the CEO of another company trying to become public right now, you are not going to have a lot of major shareholders be that happy. Once again, because there are so many individuals on Twitter they mistakenly believe they are an army and that their army will prevail.
There is no army. There are disparate individuals who, like it or not, mean nothing to the control of this company and there are large shareholders who are either voting with their feet -- hence the non-stop decline in the stock -- or who might just be hoping that someone steps up from outside the company, accumulates a position and forces a sale, something that is clearly not wanted by Dorsey or Costolo or they wouldn't be going about it this way.
Which way? By saying that the cadence of product is great and all is well because of that.
So where are we now?
Simple: a wealthy hedge fund, an activist, now has to step up and recognize that the Dorsey-Costolo show is a total non-starter and that only by putting pressure on the board by accumulating a position and demanding a sale is anything going to change.
Once that happens, then the narrative can change again. It will change when that happens because there are other companies that need a social component and Twitter, for better or worse, is still a social company with a lot of users, some of whom can be brought back if the company were to focus on user disaffection, NOT on new products.
Now, there's so much noise here because there are many people who tweet and they, too, think that new product is going to reverse slowing to no user growth. That's proven to be totally wrong so far.
There's also the regret that some of us have had of the paper losses on the position. Obviously, if there is no takeover, the stock is telling you that it's going lower. Why? Because growth is what matters, and while the revenue growth is still good year over year, revenue growth will follow user growth, meaning it will go down next year if something drastic doesn't happen.
How do we know that growth is so important? Because we see the trajectory of Facebook's (FB) sales, earnings and stock, all of which are tied together. When you have excellent growth like Facebook -- which, like Twitter, is a holding of the Action Alerts Pluscharity portfolio that I co-manage -- and smart management like Facebook, that growth will be monetized. Many scoffed at me for tweeting yesterday that WhatsApp might have been a bargain for Facebook at $19 billion. I only write that because it is the fastest-growing service Facebook has, and because Mark Zuckerberg on the recent conference call said that if you pay $19 billion for a company "we should have pretty high expectations for how it's going to do."
In other words, he's got a master plan. Is there anything about Zuckerberg that doesn't scream "give me the benefit of the doubt?"
Growth conquers all on Wall Street, and Z man knows that. He will harness WhatsApp like he did Instagram, which was also hailed as a total overpay when he bought that company.
Now back to the original arc of the story. An activist knows that this is a market that rewards acquirers. There are two natural acquirers, two companies that need social to go with mobile, connectivity and cloud: Google (GOOGL) and Yahoo! (YHOO). The latter is the actual natural buyer, because it has plenty of cash and is valued at zero if you back out its assets. It won't be worth even less than zero if it buys Twitter, because if that were the case then a company will buy Yahoo! for nothing and get Twitter for free.
Google's logical, though, too, because it is getting no return on its cash, so why not spend it on a company where your engineers are better than theirs and everyone can be fired pretty seamlessly?
The problem is neither of these two companies is going to do anything hostile, and Dorsey and Costolo clearly still want to run Twitter.
That's why an activist matters so much.
So, there are only two narratives here that I can think of: one, no activist surfaces and the stock keeps going lower because it doesn't' have growth, or two, an activist surfaces and forces the company to hire a banker to bring out value, and either Google or Yahoo! buys it.
That's why I think the next few weeks are so crucial. The longer Dorsey is allowed to run Twitter while he is trying to bring Square public, the longer Costolo is really running Twitter and doesn't have to do anything, because he believes all is good.
I think Twitter has a finite life here. The longer the drama, the less it is worth.
That's where we are.
That's why the stock stopped going down at $34.
It will continue to go lower if an activist doesn't surface soon. That's what happens to growth companies with no growth.
Fact of life.
If you can handle waiting/hoping for an activist, you can own it. If you can't, sell it. Because it can't go up without one.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long FB, TWTR and GOOGL.
Posted at 3:17 p.m. EDT on Monday, June 15, 2015
What does Rite Aid (RAD) have to do with Greece? A simple question that I got on Twitter today. The answer: I'll tell you what it does, it drives the stock of Rite Aid lower. In fact, it drives all stocks lower, because the entire market will go down on this news of a country of 11 million people defaulting on its obligations.
Time for a refresher about how the stock market really works as opposed to the way it should work.
First, the tweeter is right. Greece has nothing whatsoever to do with the actual company, Rite Aid. The business of Rite Aid is to sell general merchandise at the front of the store and to process and sell prescriptions at the back of the store. All $25 billion in sales take place in the U.S. Wall Street analysts who follow Rite Aid make up models about what Rite Aid can earn. Rite Aid's business could then fall short of those estimates and its stock should go lower. Or it meets the estimates, which usually means the stock runs in place. Or it beats the estimates, which usually produces a higher stock price. It may actually beat the estimates and then raise numbers and that almost always produces an advance in the stock.
What else can budge the stock? Rite Aid can augment its business by expanding its footprint or by buying a company like Envision Healthcare (EVHC), a pharmacy benefit manager, which will cause estimates to go higher because it is such an additive fit. That's just what happened and Rite Aid's stock rallied.
Third, the company could attract a bid. There is tremendous consolidation in the health care sector, This morning, Target (TGT) and CVS Health (CVS) inked a deal that will allow CVS to take over Target's drug store business. This is a very smart deal for both. Target can't compete with CVS when it comes to drugs. CVS pays Target $1.9 billion to be Target's partner. Both sides do well. Maybe a major company like a Wal-Mart (WMT) or a J.C. Penney (JCP) brings in Rite Aid. We see Humana (HUM) rumored as a target of Anthem (ANTM). Then we hear Anthem might be buying Cigna (CI). Or Cigna might be merging with Aetna (AET). Or UnitedHealth (UNH) might be purchasing Cigna. Rite Aid could be part of any mix. These all get rumors and suppositions going that could boost Rite Aid's valuation.
Or maybe Rite Aid just gets bought by Walgreens (WBA) to consolidate the industry.
So that's another way Rite Aid's stock could move up.
Now, let's talk about something that trumps all of those good things: Greece. Greece the country has nothing to do with Rite Aid the business.
But Greece the country has a huge impact on the stock of Rite Aid. That's because stocks trade together in line with Europe. No hedge fund manager can resist making a bet that if Greece decides to default on its obligations there won't be severe repercussions all over the world. They will look like idiots to their investors.
This "bet-against-stocks" trade isn't, per se, wrong. We don't know what the world will look like financially if a nation state like Greece defaults. Obviously, someone owns Greek debt. Where is that debt? We don't know. There isn't a schedule or a list of holders. What happens if there are some stupid banks that bought a lot of Greek bonds and need to sell other, better assets because they are buried in this junk? How do you know that some countries don't have a huge amount of Greek debt and therefore suffer downgrades from the major ratings agencies?
These downgrades of countries have always caused weakness in Europe. So have bank failures because of bad assets. These countries all trade together. Hedge funds here know that there will be a slowdown in business in Europe if Greece goes under. I think the Greeks have no idea the world of hurt that can be visited upon its people when it defaults and perhaps gets disavowed as a country that can use the euro. When that happens, however, the debt holders get hurt and we know that business on the continent will momentarily taper off or be frozen until things are sorted out.
So we would cut numbers for the international companies that happen to be headquartered here. That affects S&P futures selling here.
The dollar will also instantly get stronger vs. the euro as that currency will be in disarray over what happens with Greece, and that will cause more competitive advantage for European companies vs. U.S. ones.
So earnings estimates of our international companies will come down both from earnings translation and from order and sales weakness.
Of the 30 stocks in the Dow Jones Average, 27 have businesses that are directly affected by Europe. So 27 companies will have their numbers cut. A huge percentage of the S&P 500 also has European business.
Now Rite Aid isn't part of the S&P 500 and it has no business overseas. But Walgreens, which merged with the international Boots Alliance, does have overseas sales. Plus it and CVS are both members of the S&P 500. So they will be swept down by the derivative dominos of Greece.
So ask yourself, is it really possible that the stock of Rite Aid can go higher if the stocks of its two biggest competitors, Walgreens and CVS, are getting pummeled by financial instruments that link them to Greece? Frankly, that's inconceivable. If the two biggest drug store chains go down for whatever reason, Rite Aid's stock is going to go down, too. They are all in the exact same cohort.
So, back to the original query. What does Greece have to do with Rite Aid the stock? The answer, sadly, is everything. I say "sadly" because it sure wasn't like this 30 years ago before we had futures, because then logic played much more of a role and collateral damage was pretty much non-existent.
Now that the ridiculous but totally truthful interrelation of Rite Aid to Greece has been made clear, let's talk about opportunity. Greece may default but it won't default the next day and the next day and the next day. It is a one-off event. The market won't be that smart, though, initially, and there will be a scare that Greece will bleed beyond what happens the first day.
So there could be a second day where we discover how bad things are in Europe. And then there's a third day concentrated on the losses generated by highly leveraged hedge funds that are poorly positioned and have to sell good stocks -- meaning stocks that aren't part of the Greek blast zone and aren't down that much in order to fund the stocks of companies that are really hurt by the Greek calamity. They always seem to sell the good to fund the bad.
My conclusion? The irrational collateral damage of stocks unrelated to Greece but pulled down in its vortex should be bought near the end of day two after the debacle occurs and then doubled down on day three. So if you wanted to buy 200 shares of Rite Aid, you buy 100 on day two and 100 on day three.
Then you have a terrific buy at your price of a stock of a company that you want a piece of.
The worst that happens? Rite Aid doesn't go down and you miss an opportunity to buy because it doesn't sell off.
Why not then jump in ahead? Because why not wait to see if a sale does occur? If there's a chance to get a lower price of a company's stock why not wait for it? And, by the way, I would argue that CVS might be a better buy if it sells off because of this terrific Target tie-up.
So that's the way it works. You can do two things. One is you can bemoan it and say that the market's stupid and you are going to avoid the market and Rite Aid. Or two, you can say "boy am I lucky that Greece, something that has nothing to do with Rite Aid caused an irrational sale of a domestic drug stock" and you get a better price for the chain than you deserve.