Peiter Zatko, former security chief of Twitter, Inc. (TWTR), has turned whistleblower and testified that the company misled users and federal regulators about gaps in its security. Zatko further claimed that TWTR underestimated how many fake and spam accounts are on its platform and is riddled with dangerous security problems.

Even before the former security chief’s allegations, shares of TWTR have been declining sharply since Tesla, Inc.’s (TSLA) CEO Elon Musk threatened to end his $44 billion deal to buy TWTR. Musk accused the social media company of hiding information about the number of bot and spam accounts on the platform. Musk’s attorney Mike Ringler claimed that TWTR has not complied with its contractual obligations.

Furthermore, TWTR pursued legal action to enforce the agreement. On July 12, the company filed a lawsuit against Elon Musk in the Delaware Court of Chancery. On the other hand, on July 29, Musk countersued Twitter, further escalating the legal battle. Moreover, the recent whistleblower allegations could potentially stir up the ongoing TWTR and Elon Musk trail.

Over the past year, TWTR has declined 36% to close the last trading session at $41.05. The stock is currently trading 40% below its 52-week high of $68.41, which it hit on October 20, 2021.

Here is what I think could influence TWTR’s performance in the upcoming months:

Deteriorating Financials

For the fiscal 2022 second quarter ended June 30, 2022, TWTR’s revenue declined 1.2% year-over-year to $1.18 billion. The company’s costs and expenses increased 31.1% from the year-ago value to $1.52 billion. Its loss from operations amounted to $343.76 million, compared to a gain of $30.25 million in the prior-year period.

Furthermore, TWTR’s net loss and loss per share came in at $270.01 million and $0.35, widening 511.3% and 537.5% year-over-year, respectively. Net cash provided by operating activities amounted to $29.70 million, down 92.2% year-over-year.

Bleak Growth Prospects

Analysts expect the company’s revenues to increase 3.9% year-over-year to $1.63 billion in the fiscal 2022 fourth quarter (ending December 2022). However, the consensus EPS estimate for the same quarter is expected to come at $0.26, worsening 20.9% from the same period in 2021.

Furthermore, the company’s EPS for the fiscal year 2023 (ending December 2023) is expected to decline 21.5% year-over-year to $0.82. Also, the company has missed the consensus revenue estimates in three of the trailing four quarters.

Low Profitability

In terms of trailing-12-month EBITDA margin, TWTR’s 4.04% is 79.4% lower than the 19.57% industry average. And its trailing-12-month net income margin of negative 2.14% is lower than the 5.73% industry average. Likewise, the stock’s trailing-12-month levered FCF margin of 0.50% is 93.8% lower than the industry average of 8.01%.

Furthermore, TWTR’s trailing-12-month ROCE, ROTC, and ROTA of negative 1.64%, 1.31%, and 0.62% compare with the industry’s 8.01%, 6.66%, and 3.58%, respectively.

High Valuation

In terms of forward non-GAAP P/E, TWTR’s 39.43x is 128.5% higher than the 17.26x industry average. Its 30.39x forward EV/EBITDA is 249.8% higher than the 8.69x industry average. Likewise, the stock’s 5.86x forward Price/Sales is 335.6% higher than the 1.35x industry average.

In addition, the stock’s 4.21x forward Price/Book is 105.4% higher than the 2.05x industry average.

POWR Ratings Reflect Bleak Prospects

TWTR has an overall rating of D, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

TWTR has a grade of F for Sentiment, in sync with analysts’ weak revenue and earnings estimates. Also, it has a D grade for Stability. The stock’s beta of 1.21 justifies the Stability grade.

TWTR is ranked #46 out of 65 stocks in the F-rated Internet industry.

Beyond what I have stated above, we have also given TWTR grades for Value, Growth, Quality, and Momentum. Get all TWTR ratings here.

Bottom Line

The uncertainty around Elon Musk’s chaotic takeover bid for TWTR has dampened investor sentiment and led to a sharp decline in its stock price. In addition to battling with Musk over his decision to terminate the deal, the social media company reported poor second-quarter financials. Moreover, Ex-twitter employee Peiter Zatko recently blew the whistle, alleging the company’s reckless and negligent cybersecurity policies.

Given TWTR’s disappointing financials, bleak growth prospects, higher-than-industry valuation, low stability, and low profitability, we think it could be wise to avoid the stock now.

How Does Twitter, Inc. (TWTR) Stack Up Against its Peers?

TWTR has an overall POWR Rating of D. One could also check out these other stocks within the Internet industry with a B (Buy) rating: trivago N.V. (TRVG), Yelp Inc. (YELP), and Expedia Group Inc. (EXPE).

TWTR shares were trading at $40.43 per share on Friday afternoon, down $0.62 (-1.51%). Year-to-date, TWTR has declined -6.46%, versus a -12.98% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

More Resources for the Stocks in this Article