Twitter Stock Weaknesses Are Mostly Due to External Forces

Twitter (NYSE:TWTR) stock has fallen sharply off of its 13 month old highs. From high to low it lost more than 60% of its value.

However this did not happen because of a breakdown in its fundamental thesis. Most of it was through no fault of its own.

For months, there have been external factors contributing to the downside. Last year, the meme to sell smaller-cap stocks took a life of its own.

It didn’t matter that stocks like Twitter had strong businesses, they went on sale. The whole sector collapsed, Snap (NYSE:SNAP), Pinterest (NYSE:PINS) and Etsy (NASDAQ:ETSY) also failed. Even great financial technology stocks like Block (NYSE:SQ) and PayPal (NASDAQ:PYPL) took a pounding, in spite of their excellent fundamentals.

TWTR Stock Struggles

Twitter has shown tremendous improvement in its financials. But so far investors have not cared much. The selling has been unrelenting and systemic. TWTR stock even fell through its pandemic breakout level, and yet it’s still struggling.

This makes today’s bullish conclusion simple with only one caveat. Owning Twitter this low for the long term is not likely to be a financial mistake. However for the short-term there could be more hiccups along the way from the overall markets.

For as long as the indices are in a correction phase, TWTR is at risk from their drag. Markets have not yet found footing since the Federal Reserve rate hike jitters started. The bears have many strong tailwinds, so the bulls are at a severe disadvantage.

This is likely to last for a few more weeks because of two major factors. The first, of course, is the severity of the situation in the Ukraine region. The second comes from the fear of the Fed waging war against inflation. We might get more clarity on that when they meet next week.

Threat of Market Drag

Tomorrow we will find out how bad the inflation reading was for February. There are experts who expect over 10%, which could cause panic on Wall Street. The extreme inflation acceleration of late is likely worsening from the explosion in commodity prices.

My fill-up yesterday cost me $6.50 per gallon in Southern California. After almost a decade of struggling, suddenly almost all commodities are now on fire. While the price of oil hogs the headlines, the story extends across a wide gamut. Wheat futures prices, for example, soared 65% in about two weeks.

Investors are already on shaky ground, so they are likely to panic even further on such headlines. Timing is bad because the indices are hovering just above their Feb. 24 low. Losing that could cause another 11% correction from there. This would surely negatively impact TWTR stock, which is also as trying to find footing around $31 per share. This is the highest point of volume in five years, so it should lend support.

Buying shares into this support makes sense. But while these risks loom, investors should start with partial positions leaving room to add some later. The headline overhang should force us to be less confident with convictions.

I am certain that the profit-and-loss statement shows improvement, but for now I worry about the market drag. Twitter revenues have doubled in five years, so they earned the benefit of the doubt for that. Its low price-to-sales of 5 indicates that shareholders now have realistic expectations.

Moreover, Twitter now generates more than $800 million in positive cash flow from its own operations. This allows them the freedom to execute on plans without restrictions from banks. This is an important point when we expect the Federal Reserve to raise rates several times this year.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions 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.