On two occasions over the past couple of years, I’ve written columns exploring whether Twitter (NYSE:TWTR) or Square (NYSE:SQ) stock is the better buy. Both times I went with Square.
Now that we’re approaching the end of a very good year in the markets and Twitter stock has fallen off a cliff, losing 27% in the last month alone, Jack Dorsey, who’s CEO of both companies, has got to be contemplating picking up some more Twitter stock on the cheap.
It’s hard to believe Twitter’s share price ($29.10 shortly before 10 AM) is very close to where it was trading in November 2015. The Twitter President has done little for Twitter stock, despite his incessant use of the platform.
From a strictly financial standpoint, does TWTR stock deserve its current plight? Let’s take a look of some of its financial data, then and now.
In the first nine months of fiscal 2019, Twitter had operating income of $213.5 million on $2.45 billion of sales. In the first nine months of FY15, Twitter reported an operating loss of $382.9 million on $1.51 billion of sales.
Twitter stock has a price-sales (P/S) ratio of 6.73. Back in 2015, its P/S ratio was 7.56. The company’s sales have grown 62% over the past four years, yet it’s got a lower P/S multiple today than in FY15.
As for the bottom line, TWTR only started reporting positive earnings per share in 2018, so I’ll use price–cash flow instead. In 2015, Twitter stock traded at 45.92 times Twitter’s cash flow. Today the ratio is down to 16.64 or about one-third the multiple it had four years ago.
One of the best metrics I use to judge companies’ value is their free cash flow (FCF) yield. That’s defined as their FCF for the last 12 months (TTM) divided by their enterprise value. As of a few days ago, Twitter’s TTM FCF was $900 million while its enterprise value was $19.2 billion, so its FCF yield was 4.7%.
Apple (NASDAQ:AAPL) had a FCF yield of 5.0% a few days ago, almost identical to that of Twitter. Generally, stocks with FCF yields of 8% or higher are considered value plays.
However, considering that Twitter’s free cash flow was $35.8 million in 2015, $544.4 million in 2016, $670.5 million in 2017, and $855.8 million in 2018, it’s really hard to comprehend why Twitter stock hasn’t climbed.
InvestorPlace columnist Dana Blankenhorn recently stated that Twitter’s problems are small in comparison to those Dorsey faces at Square. That said, Dana believes that Dorsey should consider selling Twitter to a larger entity that can effectively exploit the social media platform.
Even private equity firms might be interested in Twitter, since it’s profitable and growing its monetizable daily active users (mDAUs). With Twitter stock trading at its lowest point since March, Dorsey might want to pick up some shares while he can still buy them for under $30.
Blankenhorn, the other InvestorPlace contributor, calls Square a problem child. I don’t see the payment processor that way.
Square is still one of the best money-losing businesses. Its products like Square Terminal and Cash App continue to attract new businesses to Square’s payments ecosystem.
Recession or no recession, businesses small and large need what Square’s offering. As a result, its customer base should keep growing even during economic downturns.
At the end of October, I suggested investors consider buying Square stock on the dip. Since then, it’s gained a couple of bucks, but basically it’s gone sideways so far in November. Unless a new catalyst emerges, I imagine it’s going to stay rangebound into 2020.
In 2018, my logic for owning Square over Twitter was that SQ solves more problems than Twitter does. SQ provides small, medium, and large-sized businesses with real solutions. Twitter gives consumers a place to whine and marketers a place to promote their products to whiners.
That’s hardly monumental.
If Dorsey’s smart, he’ll sell Twitter for a great price and focus all of his attention on Square in 2020.
From a valuation perspective, there’s no question TWTR stock is cheaper than SQ.
Furthermore, if TWTR stock continue to fall, potential acquirers could start to kick Twitter’s tires. Twitter might not be bought, but the interest in it should help boost Twitter stock.
At this point, Twitter stock appears to be the better buy for Jacxk Dorsey and for other investors.
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