Investing pundits tend to focus on stocks that they're recommending. But it's just as important to know which ones to shun. And when I ask myself which stocks I would avoid like the plague, two that immediately leap to mind are networking provider Juniper Networks (NYSE: JNPR) and social media company Twitter (NYSE: TWTR).
Juniper is profitable, but it's undergoing internal development and delivery problems in the part of its business where it needs success the most. My longtime bearishness about Twitter reflects an entirely different set of issues. Despite what investors may have heard or read, the social media company is not rounding third and heading for home in its user growth and profitability turnaround efforts. Indeed, the fact that Twitter stock is up about 20% over the last three weeks only underscores the reasoning that leads me to believe it's an investment to avoid.
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Oops, sorry about that
It was about two weeks in advance of Juniper Networks third-quarter earnings release that its so-so year took a turn for the worse. Rami Rahim prepped the market for a poor quarter by lowering guidance from a mid-range target of $1.32 billion to $1.255 billion -- and the reason it did that is the source of my concern.
Juniper noted in its press release that "lower than expected revenue in our cloud vertical" was the culprit. Why that's such a concern is that Juniper is quite rightly attempting a pivot toward the future. That requires a shift away from reliance on its legacy business of selling switches and routers, and toward cloud infrastructure sales.
Unfortunately, Rahim's prediction of lower total revenue because of poor cloud sales were confirmed. As if that wasn't bad enough, the underlying reason for the cloud unit's poor performance calls into question Juniper's internal processes, or lack thereof.
The $344.9 million in cloud revenue was a 4% decline, which dragged total sales down to $1.26 billion. At fault were "continued large deployment delays." When asked on the conference call how long those delays will continue, Rahim said until "the first part of next year." That explains why Juniper is expecting another total revenue decline this quarter.
Juniper's one saving grace fiscally is that it has been cutting costs, including a 4% slice in operating expenses to $528.3 million. The lower overhead resulted in a $0.01 per share increase in earnings to $0.46 a share. However, with its product deployment problems far from over, it's falling further behind in its bid to become a notable player in the cloud. Without that feather in its quiver, I'd avoid Juniper stock.
Let's get real here
Though pundits were tripping over themselves to applaud Twitter's third-quarter results, they actually made a terrible stock more abhorrent. Its supposed return to user growth was a tepid 4% year-over-year increase in monthly average users (MAUs). In addition, there was Twitter's short-term step toward profitability. These meager wins were are likely the basis for Twitter's 20% jump in share price over the past three weeks.
Let's put Twitter's "growth" into perspective. Over the past two years, Snapchat has added nearly four times the MAUs Twitter has -- 87 million to the tweet master's meager 23 million. During that same period. WhatsApp, Instagram, and parent company Facebook, have each boosted their MAUs by 400 million or more. And I'm supposed to believe that Twitter's 4% year-over-year increase is something get excited about?
As for becoming profitable, it wasn't improving sales that inched Twitter closer to the black. Total revenue declined 4% to $590 million, and that's not even the worst statistic. Ad sales sank 8% to $503 million, and revenue in the U.S., Twitter's largest market, dropped 11% to $332 million.
Twitter got nearer to profitability by cutting expenses 16%, led by decreases in sales and marketing and R&D expenses, which were sliced by 23%. In other words, CEO Jack Dorsey is putting mid- to long-term growth on the back burner to concentrate on turning a near-term profit. With scaled-back sales and marketing, not to mention minimal product development, how long could any profitability last while sales continue to drop?
Here's what could happen: Twitter might eke out a profit for a quarter or two, sending its stock price rocketing upward. Then, the other shoe may drop: Slashing overhead will no longer be able to compensate for eroding revenue. If that happens, Twitter stock could nosedive again. That makes it a stock I'd avoid, despite its rabid fans.
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