I sold my fairly large holding in TWTR back in April. One main reason I gave at the time was the slowing growth:
Lastly, I sold out of Twitter. This was a tough one for me. I was hoping they would have a good Q1 and guide high for Q2. Instead, they are really struggling. Q2 especially is looking dismal. The growth story is just off here, and I’m out until I see signs it might resume.
The problem is, the slowing growth was already priced in when I sold. So the question simply becomes either:
- What’s the next catalyst for this company and stock?
- Does this company have a greater value than the market is currently assigning to it?
I don’t believe I can reliably answer the first question. It turns out a buyout rumor made Twitter’s stock jump 20% last week. But that’s just one way the stock can be affected short term. A new source of revenue can make sales grow again. The profitability situation could be improved by cost cutting. There’s really no way to predict what will happen out of the many things that could happen. I think trying to answer question number 2 is a lot better way to make money in the stock market. Perhaps I would have had to end up holding Twitter for years before it made a huge move up. And sure, I’d rather the stock price grow at a steady 25% pace instead of, say, being flat for 2 years and then the stock suddenly doubling…but that’s just not how the market works. You just have to put your money where you see value.
And I did believe Twitter was undervalued. I just didn’t have a great idea of what was going to happen next. But I saw massive potential for a company whose market cap was down around 11 or 12B. I looked at FB at 300B or whatever. I agreed that there is a huge difference between the two major social sites. But, I argued, was FB really worth 25-30 Twitters?
I think it’s important to note that this wasn’t a situation like INFN where the market was still expecting a lot of growth, which leaves the company in a precarious position when the earnings are reported. The main reason I actually sold was the already lowered guidance – but that’s exactly the reason it was so cheap: a company like this is going to hit some road bumps as it figures out different ways to make money. I was so focused on the model they had been using and how well it worked for a while, that I couldn’t see that even if they have to pivot completely (which apparently they are having to do), this is still a HUGE opportunity.
Anyway, TWTR is up more than 40% since I sold. But that’s not why I was wrong to sell. I also sold AHGP in April. It just so happens to be up 40% or so too. However, I don’t think I was wrong to sell it. I still don’t know what to think of the company long term. It’s not a product or market I understand, and I am happy not having to follow it. I sold TWTR because I couldn’t see the short term. I sold AHGP because I couldn’t imagine the long term (still can’t).
Long story short, I now see that you simply can’t predict what a stock will do short term. Even a company (rather than its stock) can have short term fluctuations (like SKX for example) that make it unclear what will happen in the short term. But if you believe that:
a) the company is worth more than it’s selling for
b) the company will continue to be relevant more and more as the months and years go on
…then you’re probably looking in the right place. Even if you have to hold a while before anything good happens. Twitter didn’t seem like a phenomenal value based on fundamentals, but based on potential it was a steal at < 12B. I knew it, but I let it slip.
The question now is, what kind of a bargain is it at 20B? I will be pondering that the next few days/weeks.
Live and learn,