Why Twitter Is A Bad Investment, Part II

In my last post, I briefly explained why Twitter stock isn't a good investment.

Any business that hasn't turned a profit after eight years isn't doing something right.

I want to 'drill down' into the details of Twitter's financial statements and reveal more disturbing trends. Let's start with the income statement.

In 2011, Twitter posted a net operating loss of $127 million.... in 2012, a net loss of $77 million... and in 2013, a whopping net loss of more than $635 million on their core business of tweeting, re-tweeting and ad sales.

Now let's go to the Statement of Cash Flows - more interesting numbers here.

In 2011 they had a negative cash flow from Operating Activities of almost $71 million... negative cash flows from Investing Activities of $324 million... and had positive cash flow from Financing Activities of $480 million, all of it from the sale of Twitter stock. All of this totaled up to an increase in cash flow of $84 million.

For 2012 Twitter showed negative cash flows from Operating Activities of almost $28 million... positive cash flow from Investing Activities of over $49 million... negative cash flow from Investing Activities of $37 million... overall negative cash flow of about $15 million.

So far, so good for these two years. Then the results for 2013 get really interesting.

Adding back non-cash Depreciation Expenses and "Adjustments to Net Income" wiped out the operating loss and resulted in positive Operating cash flow of almost $1.4 million. Investing Activities weren't as good... they lost $1.175 billion on this category. However, the sale of over $2 billion of Twitter stock saved their financial bacon for the year, and gave them an increase in cash of more than $637 million for 2013.

Two questions come to mind after seeing these financial results:

1) What kind of "investments" are Biz Stone and his Twitteristas putting money into and getting disastrous results?

2) How long will it be before enough investors of Twitter stock wake up and realize the core business model sucks... and they can't rely on enough greater fools buying into the Twitter story?

If you want to buy this stock and speculate in the short-term, go right ahead.

Just realize that after eight years, Twitter only has a good-sounding story and enough Kool-Aid drinkers who believe that Social Media is the magic marketing elixir for whatever ails any business.

Good business and stock stories are a dime-a-dozen, very few of those stories pan out.

Unless Twitter figures out their business model and how to turn a profit, this company's stock will eventually hit it's long-term target price of zero.

Why Twitter Stock Is A Bad Investment

I can hear the "Twitteristas" and social media gurus hatin' on me now, saying things like:

"I've got 55,349 followers and bunch of re-tweets every day... how can this be a bad investment?"

"Look how many gazillions of people are on Twitter!"

"Dude... You just don't get the power of the Twittersphere! #doesntgetit "

I know that a bunch of people are on social media sites like Facebook, Twitter and LinkedIn. However, sheer numbers and popularity by itself doesn't make anything a good investment.

And I know that Gary Vaynerchuk owns Twitter stock. He's a successful businessman, but I don't think he's made a wise decision... and I'll tell you why.

Mark Twain said that history doesn't rhyme, but it often repeats itself.

The business tune that Twitter is playing sounds an awful lot like the companies from the Dot.Com Boom who aren't around anymore: Pets.com, Global Crossing and MCI WorldCom, to name a few.

Pets.com had a sock puppet as their mascot who was on a lot of TV shows in the late 90s. It promoted "buzz" and the dreaded "brand awareness," but in the end this wasn't enough

These companies in the Dot.Com Boneyard had a lot of PR and hype... and little to no earnings to show for it. That's exactly what I see with Twitter - especially when the company is losing $2.50/share, and over $635 million for FY 2013.

That's over a half a billion dollars, financial sports fans, and I haven't heard how they plan to make money. Sounds overly simple, but it's true: Before you decide to invest in a business, you should see if it's turning a profit.

Vaynerchuk is also a well-known social media disciple, which gives Twitter and its stock credibility. But the numbers are the numbers and the company has been in business since 2006 - which should be plenty of time to figure out how to turn a profit.

If Biz Stone and his crew can't make money after eight years, that's a big red flag from an investing standpoint.

Does Twitter have some value to conduct keyword and question research, to network and connect with like-minded people? Yes.

However, if you want to invest your hard-earned money in Twitter stock, there are plenty of better investments I can think of.