Ignore the Haters: Twitter's Earnings Still Make it A Buy

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I am all in favor of skepticism when it comes to conventional wisdom, and my training in forex dealing rooms taught me that a contrarian trading style usually offers a better risk/reward ratio than running with the herd, but that doesn’t mean that the contrarian stance is always correct when it comes to assessing a stock’s potential.

Some stocks just seem to attract haters, who look for the negative in every piece of news and every move while ignoring the positive, and some attract fans who do the opposite. Twitter (TWTR) is in the first category.

In some ways that is understandable. Twitter is a high-profile company that, for around four years did nothing but disappoint, and I’m sure there are people out there that got severely burned as their stock collapsed from post-IPO highs of over $50 to below $15. I’m equally sure that there are plenty of people whose user experience has been bad on the notoriously troll-heavy platform, but neither of those experiences have anything to do with how the company is performing right now.

Still, even before they released earnings this morning, there were articles such as this, warning that even if the numbers were as good as the market was indicating, TWTR was still not a buy. The market has given its verdict on that. After beating on both the top and bottom line this morning, TWTR is trading around twenty percent above yesterday’s close.

The problem is that the bear argument as laid out in that article rests on two pillars, both of which are fundamentally flawed.

The first is that user numbers have plateaued, and the naysayers will no doubt point to the fact that Monthly Active Users (MAUs) grew only around four percent last quarter and missed expectations. That, however, is to ignore two things. Daily, as opposed to monthly user numbers, grew by a decent twelve percent year-on-year, and low growth is at least in part down to a deliberate strategy.

Twitter has been actively attempting to turn themselves around for a while now, but that is not just in terms of finally getting to GAAP profitability as they did last quarter. They have also been working on improving the user experience, deleting a large number of bots and particularly hateful trolling accounts. It is hard to show any kind of growth when you are reducing your existing account numbers voluntarily, but Twitter is still managing to do just that.

The second thing used to justify negativity about a stock that keeps beating expectations is the claim that without the person widely seen as the engineer of those beats, Twitter will quickly fall back into its old ways. That person is COO Anthony Noto, who has left the company to become CEO of the privately held company SoFi.

There is no doubt that Noto’s contribution to the turnaround has been huge, but there is absolutely no reason the company cannot continue on the path he carved out for them without him there. That is the logic used by those who shorted Apple (AAPL) after Steve Jobs died when the stock was trading at less than a third of its current price.

One person can indeed drive results, but they can also create a culture and a corporate mentality that stays long after they are gone.

As I pointed out three months ago when Twitter released Q3 earnings, the critics are trying to punish the company for addressing previous criticisms, and that is just absurd. The same people who were saying a year or so ago that the company had to focus on profitability not user growth, and that improving the user experience, even at the cost of lower MAUs, would be the best way to assure future expansion, are now saying that the result of doing what they asked is a negative.

I guess there is just no pleasing some people, but smart investors will realize that what I said back in October still applies. Unlike some companies, Twitter took the criticism on board and did what they could to address it, which demonstrates an admirable responsiveness. In doing so they made fundamental changes that prompted the move to profitability and which suggest future profit growth.

As a wise woman once said “Haters gonna hate...”, but that doesn’t mean that TWTR is anything but a buy for long-term investors.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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