Should You Buy Twitter After Strong First-Quarter Earnings?

By Motley Fool Staff Markets Fool.com

While Twitter (NYSE: TWTR) is showing signs of improvement, it may still continue to underperform the broader market, in which case Twitter shares may not be a compelling investment.

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In this segment ofIndustry Focus: Tech, Motley Fool analyst Dylan Lewis and contributor Evan Niu, CFA, discuss how even if Twitter becomes a stronger company, it could still lag as an investment for public shareholders.

A full transcript follows the video.

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This video was recorded on April 28, 2017.

Dylan Lewis: We talked about some of the progress we're seeing here. Evan, are you buying into Twitter's turnaround story? A lot of the numbers here seem to be moving in the right direction. But I also see a lot of reasons for pause.

Evan Niu: I'm not really interested in Twitter as an investment. I do think they can become a sustainable business with a place in the world, and provide a service that provides value to people. But that doesn't necessarily mean they're going to be a good investment for public shareholders. You can have a solid company that can operate and be sustainable and still underperform the broader market. Those two things are certainly quite common and not mutually exclusive. I think Twitter is on its path to becoming more of a long-term company, in terms of how it's being run, and holding down its place that it's carved out for itself. And while a lot of these metrics are improving and heading in the right direction, it's just one quarter. I still don't think Twitter is going to be an outperforming investment, in which case, I'm not interested.

Lewis: I'm kind of thinking along the same lines here. For me, this is a company that has been poorly managed for such a long time. There's been that revolving door of CEOs. They've gone through so many different platform identity crises. There was a period half a year ago when management was looking for a buyer for the business. Given all of that dysfunction, I think I need to see more before I'm really thinking about this as serious investment opportunity at all. It's great to see some of these metrics trending the right way. But I also really want to see if they can continue to sustain this user growth. We talked about how, to a certain extent, the current political environment is something that is helping out the business a ton. Is that going to be short-lived? Long-lived? Will major changes to the platform continue to fuel what they're seeing on the user side? There are a lot of questions, and I need more solid answers and metrics to hang my hat on before I give them a serious look.

Niu: Right. And something you mentioned a minute ago, in terms of the changing product direction and revolving-door CEOs, I think if you haven't already, and any listeners also, you should check out Hatching Twitter by Nick Bilton. It came out a couple years ago in 2013 or 2014. It's not a new book. But it gives a really good account of Twitter's founding and the early days and how much in fighting and backstabbing and betrayal there was in those early days. Between Jack Dorsey and Evan Williams, two of the co-founders who had a constant power struggle. But, to your point, they each had different vision for the products. I think if you read the story, it really gives you some context into why Twitter has always seemed to lack direction as a company and a product. It's really useful, really good for investors to get that context of the culture that Twitter grew up in, which kind of explains why it's still been so hard for them to figure out exactly where they fit in the world, because of these conflicting visions about the product very early on. I don't know if those types of culture concerns persist to this day. But it's a really interesting story, and I think some very useful context. I would highly recommend anyone who's interested in Twitter as a company, stock, or service, should go read the book. It's a pretty good book.

Lewis: It's always nice to send the listeners home with some homework. That's the book on Twitter, Hatching Twitter, you said?

Niu: Yeah, Hatching Twitter, it's written by Nick Bilton, who is a really prominent New York Times journalist, now writes for Vanity Fair. He did a really good job, and he had good access, too, he had access to all the co-founders, so really good first-hand accounts of how everything went down. A lot of betrayal and power-grabbing.

Dylan Lewis has no position in any stocks mentioned. Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.