Twitter: Not Supposed To Be Easy

Investment Thesis

Twitter (TWTR) released results that forced the stock to return much of the gains from the past twelve months. Notwithstanding a volatile stock performance, Twitter continues to perform incredibly well.

Ultimately, this stock remains an incredibly attractive investment opportunity.

Q3 2019: Leading Where It Matters

How can the stock be a rewarding opportunity if it sold off more than 20% since earnings? Because investors are notoriously fickle and short-term-oriented.

What should have been the focus, the growth in monetizable DAU (mDAU) for the fourth consecutive quarter, seems to have slipped from investors' minds. Why is this important?

Because it fundamentally proves that Twitter has a strong moat. That Twitter has staying power.

Poor Q4 Outlook Discussed

Twitter's outlook for Q4 2019 shows that its top line growth rate is decelerating. Admittedly, this is true, but investors are not valuing Twitter for strong growth.

More critical is Twitter's ability to engage with its audience. Consider this, advertisers looking to reach a key demographic on the day of launching a significant campaign, would they not look to deploy some of their budgets towards Twitter? Failure to do so would even be considered a failure!

Twitter's CFO Ned Segal noted that product bugs were responsible for 3% headwinds in year-over-year comparisons in Q3 2019. These temporary issues are going to continue to plague comparisons going forward into Q4, where these bugs will reduce Twitter's revenue growth rate by at least 4% year over year.

Unparalleled Cash Generation

Towards the end of the bull market, the only metric investors care about isrevenue growth rates.

The problem though, is that revenue in of itself is meaningless. What fundamentally matters is free cash flow, and the company's sustainable ability to generate future free cash flow. Surprised to hear me say that?

When a company misses expectations, its margin of safety does not come from its revenue line or even its balance sheet.

Incidentally, a recent study shows that value investing is dead. Arguing that value investing is derived from a company balance sheet!

Of course,youknow better that true value investing is buying a company at a discount to its future free cash flows (discounted at an appropriate rate).

Let's take a step back. Two years ago, Twitter was being valued 50%higher, north of $45 per share, even though its free cash flow was 50%lowerthan it is today.

Digging further, Twitter is on target to make $900 million of free cash flow. You may declare that we should take the aggressive view and back out all of Twitter's guided full-year 2019 stock-based compensation of $380 million.

However, before doing this, note that CEO Jack Dorsey gets no stock-based compensation from Twitter.

Source: Proxy

His reward from Twitter is not derived from cash or stock, simply a function of his 2.65% ownership in the company.

So which other shareholder has more skin in the game?

Valuation - Large Margin Of Safety

Let's compare Twitter at less than $24 billion market cap with either Snap (SNAP) or Pinterest (PINS).

On the one hand, neither of those two enterprises are even close to making a strong profit yet.

On the other, Twitter has shown that not only it is capable of making profits but it's one of the few social media platforms which is actually capable of converting its revenues into free cash flows.

The Bottom Line

It's not supposed to be easy. Anyone who finds it easy is stupid. [Charlie Munger]

Investors appear to have lost their enthusiasm for Twitter. What better buying opportunity than buying when others won't?

It is not easy to be a contrarian. But it is rewarding.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.