Avoid Twitter as It Drifts Lower and Free Cash Flow Stays Negative

Twitter (NASDAQ:TWTR) has been drifting down due to its lower-than-expected forecast for revenue this year. It ended last year at $43.22, but as of Thursday, Feb. 17, TWTR stock was at $35.43, or down 18% year-to-date (YTD).

Investors can probably expect more of the same as analysts revalue the company’s lower prospects going forward.

This all occurred as a result of the company’s Feb. 10 earnings release. Although growth came in close to expectations, the market has become concerned with its outlook going forward.

Where Things Stand With Twitter

For example, as Seeking Alpha points out, Twitter said it expects to generate between $1.17 billion and $1.27 billion in revenue in the first quarter. But this was lower than expectations of $1.26 billion in sales prior to this guidance by the company.

Moreover, the company is now projecting an operating loss of between $225 million and $175 million for Q1. A year ago, Twitter posted an operating income of $52 million and an operating profit margin of 5%.

In other words, the company is rowing backward. It’s going from positive operating profits to negative, even by its own forecast.

There’s not much that is pretty here in what it did during Q4. Its free cash flow (FCF) was decidedly negative. For example, page 10 of its earnings release shows that FCF was negative $666.8 million. This compares to a positive FCF of $38 million last year. For all of 2021, it had an outflow of $370 million in FCF compared to an inflow of $128.7 million in 2020.

The company blamed its woes on lower ad engagement and higher ad cost per engagement — up 39% year-over-year (YOY), according to the earnings call transcript.

The company is still picking up “monetizable daily active users,” or mDAUs. But the growth rate is much lower than a year ago. You can see this in a convenient table that an analyst at The Motley Fool put together. It shows the progression from 27% YOY growth in mDAUs last year down to just 13% in Q4 this year.

In other words, growth is slowing. This will lead to a much lower valuation of TWTR stock going forward.

What Twitter Stock Is Worth

TipRanks reports 27 analysts now estimate that TWTR is worth at least 32% more at $46.85. The same is true at Seeking Alpha, where 40 analysts are at $46 per share.

But Seeking Alpha has a chart showing this price target is way down from before the earnings release. It shows that as late as Oct. 22, 2021, these same analysts had average target prices of $71.23. And even on Jan. 21, the average target price was $61.68.

So in less than one month, the average target price has dropped 25.4%. This coincides with the drop in TWTR stock during this period as well.

Personally, I find it hard to value a mature tech company like this when it can’t produce positive FCF. Twitter should be at the point where it is gushing forth cash. Even the fact that it upped its buyback program from $2 billion to $4 billion does not mean much when the company can’t afford to do this with negative FCF.

What to Do With TWTR Stock

The company seems to be at an inflection point. People are still using Twitter, but its growth rate is slowing. The slowing growth is hurting its ability to monetize and produce positive free cash flow.

In my mind, that makes the stock unworthy of an investment thesis from a value standpoint. Investors are likely to do much better with other digital ad companies like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) or Amazon (NASDAQ:AMZN), whose ad revenues are surging.

Most value investors are likely to pass on this stock for the time being — at least, until it can start to regularly achieve positive and recurring free cash flow.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com runs the Total Yield Value Guide which you can review here.