For most of the past 15-20 years, the market has been flush with cash, and many stocks have traded at astronomical heights without real businesses to support them. In this exuberant market, fundamentals mattered little while momentum and technical rule the day. However, as excess liquidity dries up and global economic concerns weigh on the minds of investors, the reconciliation between cash flows and valuations has arrived. Now, fundamentals matter…a lot. Over the long term, it only makes sense to deploy capital into those businesses that actually generate adequate returns on invested capital (ROIC). Due to change in market mentality, and in light of the recent downturn in the market, we felt it time to revise our price target for Twitter (TWTR: $15/share)

Twitter’s Business Model Remains Broken

We put Twitter in the Danger Zone in June 2015. Since then, TWTR is down 59% while the S&P 500 is down only 12%. Our report was among the first to identify the fatal flaw in Twitter’s business model:

“The best interests of the users (i.e. quick, easy access to the content of their choosing) are not aligned with the best interests of advertisers (i.e. getting more attention of users not necessarily looking for them).”

We also highlighted other issues:

The main issues for which we see no answer is that the path to profitability puts the company in a catch 22, to become profitable, Twitter must alienate its users or to grow users, Twitter must alienate its advertisers. With this flaw in mind, it should come as no surprise then that since 2012, Twitter’s after-tax profit (NOPAT) has declined from -$44 million to -$490 million. Figure 1 has the details.

Figure 1: Twitter’s Business Model Lacks Profits

Sources: New Constructs, LLC and company filings