Twitter Looks Like an Undervalued Stock Worth Buying

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May 20 2014 10:32 AM

Here's Why You Should Buy Twitter Stock

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Twitter's latest user. #sharepriceboost?

Photo by Tristan Fewings/Getty Images for Invictus Games

This post originally appeared on Business Insider.

I just bought $1,000 of Twitter stock, even though I've been a critic of the company for months. Recently I've concluded that TWTR has become beaten down so far that it ought to be regarded as a prime candidate for anyone who wants to buy a stock while it's cheap.

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More importantly, I believe that Twitter's underlying business is sound, and that the broader market misunderstands how it works.

Put those factors together—a pummeled share price, a solid company, and widespread ignorance of the underlying business — and that looks like a buying opportunity to me.

Usually, journalists are forbidden from investing in the companies they write about because it might make them biased. It's a good rule. At BI we have a more liberal policy, merely requiring transparency and disclosure. (You can see my permanent conflict of interest disclosure here.)

More broadly, I found that owning stock made me much more sensitive to news about the companies and what was going on inside them. (I previously bought and then sold Facebook and Google.) It made my understanding of them much more acute. Obviously, my stake was not trivial in terms of my personal finances. But nor was it large enough to change my life in any way.

Here's why I've decided to to take the plunge on Twitter.

They say you should buy low and sell high. At the beginning of this week, TWTR was trading at $32.07, down from its post-IPO high of $73.31. That looks like a valley to me. (I bought at $32.28.)

The stock has been beaten down by its poor user metrics. User growth at Twitter seems to be stalled (only about 255 million people use the system, compared to Facebook's 1.2 billion). As Twitter's user base appears to be topping out, Wall Street has concluded that there is no more growth to be had at the company.

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In terms of users that may be true. But not in terms of revenues or profits: Twitter doubled its revenues in both the last two quarters. Its net income is so marginally negative that it's clear Twitter can become profitable any time CEO Dick Costolo chooses — and that the company is reinvesting its money in future growth. (A possible investment in SoundCloud is one such idea.) I believe that investors can't ignore a financially growing business forever, regardless of what the user metrics are.

Wall Street's understanding of how Twitter works—and how it can potentially develop its business—is rudimentary at best: Wall Street thinks that Twitter's advertisers buy promoted tweets and ... er, that's it.

In fact, Twitter has acquired or developed nine separate businesses that throw off a huge amount of data on what users are doing. Twitter is incredibly embedded into the web and the mobile web. Virtually every significant web site and mobile app has a Twitter integration. And Twitter is most heavily used by people who need to be plugged in, people who need news now. Your mom may never join Twitter. But she may never join LinkedIn either, and no one ever criticizes LinkedIn for not having enough users.

At Twitter, it's going to be all about the targeting that massive embedded structure provides.

Good targeting data is like gold for online advertisers. It can be used in an endless number of different ways. Who saw Twitter's #AmazonCart deal coming? It doesn't matter whether this deal is going to move the needle at Twitter or not. The point is that the platform can be used in a huge number of different ways and advertisers have barely begun to scratch the surface.

CEO Costolo has not made a great case to investors about the future growth of Twitter, in my opinion. But that doesn't mean he's wrong. Even on his first-ever earnings call, when investors were selling the stock because the user metrics were soft, Costolo pointed out that the company was already experimenting with user interface redesigns to make the app more friendly. In other words, he's not blind to the company's flaws. They're being fixed.

That's why Twitter is now a buy. I intend to hold Twitter for a long time period, and won't be surprised if it declines even more before going back up again.

Jim Edwards is a deputy editor at Business Insider. Follow him on Twitter.

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