In 2016, Vanity Fair carried a post titled Jack Dorsey and Twitter are having a terrible 2016. Jack won’t forget that year in a hurry. For probably the same reason, neither will Shankar Sharma.
Twitter, the stock, was plummeting to new depths.
Twitter, the company, openly declared that it was conducting layoffs as it wrestled with repeated losses and needed to reignite the growth engine.
Twitter, the board, was contemplating a sale, with Google being the most logical suitor because despite amazing success in search and smartphones, it had insufficient traction in social networking. But one-by-one, the contenders back off: Google, Apple, Walt Disney, Salesforce, Verizone and Microsoft. Dismal scenes.
This is when Shankar Sharma, Vice Chairman and Joint Managing Director at First Global, and Devina Mehra, Director and Chief Investment Strategist at First Global, came onto the scene.
Why Twitter?
In How Shankar Sharma made money on the Amazon stock, I detailed his firm’s thought process. They began to pass the Twitter stock through various filters.
When the stock was listed on Nasdaq in November 2013, it was priced at $26/share. The very first trade came in at $45.10 and the stock closed at $44.90. By December that year, it peaked at $73.31. In 2016, it touched a low of $14.
Twitter had a market capitalization of around $12 billion, with $3 billion in cash. So, the net market cap was around $9 billion, which was less than that of even Flipkart.
Twitter would evoke strong reactions, from bulls and bears. But the general prognosis was tepid at best. Wall Street was sceptical that Twitter can effectively grow its user base and substantially increase its revenues. CNBC quoted a research note from Global Equities Research stating that Twitter is “toast” and “not even a $10 stock”.
As TIME reported in 2016, when Twitter went public in 2013, it was an unprofitable company. More than two years later, that hasn’t changed. In fact, the company has lost more than $2 billion in total since launching a decade ago. It has accrued more than $400 million in losses before going public, but that figure exploded upward after its IPO, largely due to stock-based compensation awarded to employees.
The investing thesis
- Twitter, the company, had very little debt.
- Free cash was about $600-700 million every year, which means that contrary to perception, it was not a cash-burning tech company.
- Twitter’s EBITDA was $600 million and runs at about 25% EBITDA, which is terrific by any standards. Below EBITDA, it had only depreciation and stock compensation losses. So while it showed a loss at the bottom line, that was basically some element of depreciation and a big element of the stock options.
- Twitter was a solid company, with a solid EBITDA, and a solid free cash flow. As far as any reasonable method of profitability was concerned – Twitter was a profitable company, and not a basket case.
(EBITDA = Earnings Before Interest, Taxes, Depreciation, Amortization. Subtract expenses from revenue (excluding interests and taxes) without depreciation and amortization, and the number you get paints a basic picture of the company’s profitability as well as its ability to pay off what it owes.)
Comparison with Snapchat
Snapchat was to come out with its IPO in 2017. How did this compare with Twitter, that listed in 2013 and whose stock price was languishing at lows?
Snapchat was looking at a $25 billion valuation, as against $10-13 billion for Twitter.
At that time, Snapchat had 15 crore subscribers as against 35 crores for Twitter. Snapchat has $300 million in revenue versus nearly $3 billion for Twitter. While the number of subscribers was just around 2x, the revenue was 10x. That told him that Twitter milks its subscribers more lucratively as compared to Snapchat.
Snapchat was more “fun” (to quote its CEO Evan Spiegel); its self-destructing shared images allow for snappy communication that doesn’t go on the social media permanent record. But Sharma was looking ahead.
He was of the view that Snapchat is very American-centric with a limited sphere of influence while Twitter, with a vast sphere of influence, was more of a global play. The news that gets broken on Twitter is much faster than any other media platform in the world.
Do note, this analysis was done in 2016, prior to the U.S. and India elections. The rise of extreme right-wing politics across the world – be it in India, the United States, or Europe, called for a platform. Twitter is the only platform in the world where you can vent, troll and attack opponents. It permitted ‘handles’ to reach individuals who they would normally never obtain access to. Which means that the subscriber base would increase tremendously.
They bought the stock at around $17 in 2016. As of today, it has crossed $40, and they still hold it. So yeah, go figure.
Shankar Sharma presented these views initially at the Morningstar Investment Conference. He will also be presenting on his stock picking strategy at the 9th Morningstar Investment Conference to be held on September 17-18, at Hotel Sahara Star, Mumbai.
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