Avoid TWTR stocks as they fall and free cash flow remains negative

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

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Investors can likely expect more of the same as analysts reassess the company’s weaker outlook going forward.

This all happened following the company’s earnings release on Feb. 10. Although the growth was close to expectations, the market worried about its future prospects.

Where are things going with Twitter

For example, as Looking for Alpha points out, Twitter said it expects to generate between $1.17 billion and $1.27 billion in revenue in the first quarter. But that was below expectations of $1.26 billion in sales before this direction from the company.

Additionally, the company now expects an operating loss of between $225 million and $175 million for the first quarter. A year ago, Twitter posted an operating profit of $52 million and an operating profit margin of 5%.

In other words, the company is rowing backwards. It goes from positive to negative operating profits, even according to its own forecast.

There’s not much pretty here about what he did in the fourth quarter. Its free cash flow (FCF) was decidedly negative. For example, page 10 of its earnings posting shows FCF was negative $666.8 million. This compares to a positive FCF of $38 million last year. For the whole of 2021, it recorded an outflow of $370 million in FCF compared to an inflow of $128.7 million in 2020.

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

The company continues to recruit “monetizable daily active users,” or mDAUs. But the growth rate is much lower than a year ago. You can see this in a handy chart that an analyst from The motley fool put together. It shows the progression from a 27% annual growth in mDAUs last year to just 13% in the fourth quarter of this year.

In other words, growth slows down. This will lead to a much lower valuation of TWTR shares going forward.

What is the Twitter stock worth

TipRanks reports that 27 analysts now believe TWTR is worth at least 32% more at $46.85. It is the same to Looking for Alphawhere 40 analysts are at $46 per share.

Corn Looking for Alpha has a chart showing that this price target is well down from before the earnings release. It shows that through October 22, 2021, these same analysts had average target prices of $71.23. And even on January 21, the average target price was $61.68.

Thus, in less than a month, the average target price fell by 25.4%. This also coincides with the drop in TWTR stock during this period.

Personally, I have a hard time evaluating a mature tech company like this when it can’t produce positive FCF. Twitter should be at the point where it’s springing money. Even the fact that it increased its buyback program from $2 billion to $4 billion doesn’t mean much when the company can’t afford to do so with negative FCF.

What to do with TWTR shares

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

In my mind, that makes the stock unworthy of an investment thesis from a value perspective. Investors are likely to do much better with other digital advertising companies like Alphabet (NASDAQ:GOOGNASDAQ:GOOGL) Where Amazon (NASDAQ:AMZN), whose advertising revenues are exploding.

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

As of the date of publication, Mark R. Hake held no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com run it Guide to Total Return Value that you can see again here.

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