There's Only One Reason to Buy Twitter

Twitter (TWTR) reported its Q2 earnings yesterday, and despite the company beating the earnings estimates, shares fell roughly 15% due to weak Q3 guidance. While my long-term stance on Twitter has been bearish, I did recommend buying the stock going into earnings. My primary reason behind trading Twitter into earnings was the amount of gun violence in the last few months.

Generally, people tend to use Twitter a lot more during such incidents, which would ultimately lead to a rise in DAUs and MAUs. The Daily Active Users added for the quarter did come in above the expectation, Twitter’s disappointing guidance overshadowed any progress that the company might have made during the quarter.
 Twitter’s revenue guidance for Q3 stood at $600 million, which turned out to be a big disappointment as Wall Street analysts were expecting it to be roughly $700 million.

Going forward, I still think the only reason to own Twitter would be the hopes of a potential acquisition. If LinkedIn (LNKD) can get acquired for a 40%+ premium, I am quite sure Twitter will find a potential suitor soon as well.

However, as a long-term investment, I don’t think Twitter is a good fit, especially as long as Jack Dorsey is the CEO and I have been saying this for quite some time. As long as Dorsey is at helm, the chances of Twitter making a comeback are very slim.

Hence, an acquisition is the best case scenario for Twitter longs at this point in time. I have often recommended investors to not buy stocks just on the hopes of an acquisition, however I am going to make an exception for Twitter as I think the chances of the company being bought out are really high.

Since this would be a speculative investment, I would not advice readers to have more than 5% of their portfolio allocated to this trade.

Conclusion

While my thesis on gun shootings leading to higher user engagement on Twitter was correct, the company overshadowed all the progress by guiding for a very weak Q3. Going forward, the chances of Twitter making a comeback remain slim especially till the time Jack Dorsey is the company’s CEO. However, the chances of Twitter getting acquired are pretty high, which is why I think investors can consider allocating a small percentage (roughly 5%) of their portfolio to the stock.

Disclosure: No Position.
Published on Jul 29, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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