Twitter 'bloodbath' will end soon

The bloodbath in Twitter-land will come to an end soon, one way or another. Twitter's market cap now stands around $10 billion. I'll ask you this, what large tech company (Alphabet, Microsoft, Facebook, etc.) wouldn't want to own Twitter at this point?

The question ahead of Twitter's earnings report after the bell on Wednesday is: When does Twitter cry uncle and throw in the towel on attempting to jump start what has been non-existent user growth on its platform? How much more pain can the stock take before activist shareholders step in and force a sale of the company? It can't be long — the stock is far too undervalued for the strategic importance and promise of its product. There are too many large egos in Silicon Valley (or New York) who believe that they are the ones to unlock Twitter's potential as a medium and a business.

This won't last forever. A resolution is coming. The only thing that stands in the way is the feeling among some that Twitter as a platform is basically a public good at this point, and needs to stay independent in order to serve the general public. This isn't a far fetched idea. Kickstarter, the massive crowdfunding platform, turned itself into a "public benefit corporation" last year. I'm not saying Twitter will go that route, but right now it is de facto being run as one given the board's refusal to maximize shareholder value (don't tell me Twitter hasn't had takeout offers well above market value, they have).

Twitter's trailing 12-month price-to-sales ratio now stands at a laughable 4.7 vs. Facebook at 15.9. The problem for Twitter, however, is that, at about $700 million a quarter in revenue, they are only growing at about 50 percent year-over-year, while Facebook, at $5.8 billion in quarterly revenue for the December quarter, is growing at about 52 percent year-over-year. For high growth, high multiple companies, the slope of revenue growth deceleration is incredibly important, and investors are basically betting that Twitter's is going to drop off a cliff here before the business reaches huge scale. Given its user growth issues, that's not a terrible assumption, and it's scary.

Even worse, it seems Twitter has lost the trust and respect of the market. Meaning, it could post a reacceleration in revenue growth when it reports earnings but because the market does not trust management's ability to execute on product or marketing, they'll assume Twitter stuffed the ad channel on its platform in a one time rush to prove investors wrong about its trajectory.

Analysts are looking for 13 cents on $712 million in revenue in Twitter's earnings report, according to the Estimize consensus from over 300 hedge fund, brokerage, independent, and amateur analysts, slightly above expectations from Wall Street analysts. And, while the Estimize consensus has been more accurate than Wall Street 89 percent of the time, my expectation is that the company misses both of those numbers, and the last chapter of the Twitter saga is at hand. The stock may even react kindly to this outcome as investors begin to assume an activist hunt and an eventual sale at a premium (what that premium is, who knows).

Mark Zuckerberg once publicly remarked (amazingly, I might add), that Twitter was "such a mess, it's as if they drove a clown car into a gold mine and fell in." Yeah, he actually said that — and it's true. Twitter has succeeded up until this point in spite of itself. Turning around this sinking ship with this management team is going to be tough, given their refusal to build products focused on the actual core user base of Twitter, versus attempting to become something akin to Facebook.

Twitter's refusal to market its product for what the product actually is, tells the whole story, and will eventually lead to a takeout (under) by one of the Silicon Valley behemoths.

Commentary by Leigh Drogen, founder and CEO at Estimize. Prior to founding Estimize, Leigh ran Surfview Capital, a New York based quantitative investment management firm trading medium frequency momentum strategies. He was also an early member of the team at StockTwits where he worked on product and business development. Follow him on Twitter @LDrogen.

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