When a stock as popular as Twitter reports earnings, you can be sure Jim Cramer will be sifting through results very carefully.
Part of the difficulty presented by Twitter is that a sizable portion of shareholders have an emotional attachment to the service and, by proxy, the stock. "People love Twitter. I am no different. A series of pictures I posted "A series of pictures I posted about our giant African tortoise, Cactus, sticking her neck out to eat watermelon on a hot day lit up my feed."
But as fond as Cramer is of Twitter, he believes there's a limit to the premium pros will assign the stock. And he can't help but wonder if the metrics already make it too expensive.
"Right now, Twitter is a money-losing company with a slowing growth rate, meaning its growing but not growing as fast as it used to grow. That's exactly the kind of company Wall Street is showing no patience for," Cramer explained.
However, that's not to say Cramer is a Twitter bear. He believes shares can rally, however, he thinks the catalysts are very specific. Looking at earnings metrics that could move the stock, Cramer said, "The Street will need to see advertisers, the only real source of revenue here, spend much more on Twitter as a piece of their digital spending pie."
Also Cramer says the Street wants Twitter to show an increase in monthly average user growth.
"If Twitter's monthly average users reaccelerate after last quarter's shocking slowdown I think the stock could go up a bit but not if the advertising dollars aren't up commensurately. However, if the ad dollars increase at a faster pace than expected you could have a $45 stock." And, on the flip side of the coin, "If it doesn't reaccelerate, then, I think it goes back to under $30," Cramer added.
On top of that Cramer thinks Twitter needs some kind of upside surprise that says to pros they should hold Twitter over Facebook, otherwise he expects, post earnings, some money will rotate into the latter.
All told, for earnings to drive shares of Twitter higher, Cramer says pros will need to see more tweets, more revenue growth and some kind of upside surprise. "I think that's too tall an order for the company at this juncture."
But, as with so many investments, there's a caveat. Cramer says the Street could overlook near-term weakness if some very specific developments unfold.
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"If the company were to lay out a more disciplined growth path including how advertisers are now working closely with them on some new campaigns, the way they advertisers have embraced Facebook or Zillow or Yelp, then pros may find the stock more intriguing."
"Or, if , Twitter's new CFO and former Goldman Sachs research partner talks about potential changes that broaden the appeal of the service and widen the network of Twitter followers," that too could be bullish.
And, there's an outlier that also makes Twitter potentially attractive.
"If this current management team can't monetize the unit growth, maybe someone else can," Cramer speculated. "Maybe someone would pay, say $32 billion for this $22 billion company to capitalize of the interface and sew up a valuable group of enthusiasts. I think Apple, Microsoft, and Yahoo, might all take a swipe at Twitter if the current team doesn't turn it around."
Therefore, if you have an appetite for risk, Cramer can understand buying Twitter but only on weakness and after the report.
And make no mistake. Cramer's play is only for investors that can stomach a potentially wild ride. If you're a more conservative investor, then Cramer suggests viewing Twitter as a stock that, around $38, is in no man's land. That's not where you want to be.
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