The past three months have been far from ideal for Twitter (TWTR). While the company is battling with user growth problems that it needs to fix, its stock is bearing the brunt, having lost almost 13% in value in the period through August 4. Making merry among all of this are short sellers who in the week ending July 28 alone gathered nearly $196 million worth of mark to market (MTM) gains on $1.13 billion short interest, according to research from S3 Partners.

The Twitter stock was up 20% YTD till the company announced its second quarter earnings early July 27. A 5% year over year decline in total revenue and wider net loss saw the stock dive. It opened 11% lower and ended the day down 14% compared to the previous close, making the shorts very happy.

The Story of Shorts

Short selling essentially is a means to bet against an asset or essentially believe that the value of the asset will decline going forward. One notable example is George Soros’ short of the British Pound in 1992 that was termed as “breaking the Bank of England.”

Another example could be hedge fund manager David Einhorn’s short bet against Lehman Brothers. Einhorn had expressed his concerns about the disclosures that Lehman Brothers had made about the amount of toxic assets it held on its balance sheet in May 2008. Einhorn was vindicated when the investment bank filed for bankruptcy within four months.

But do short bets pay off? Not all the time. Recently, Tesla saw huge short interest and even as Elon Musk called them out on Twitter, it was the Tesla stock rally that really hurt short sellers. ( See also: Elon Musk To Doubters: "These Guys Want Us To Die")

Twitter Ain’t Chipper

President Trump certainly believes in Twitter, sometimes taking to the platform to make policy announcements but there's quite a bit that makes investors wary of the stock’s performance.

  • Competition: The company’s second quarter earnings confirmed the uphill task the company faces in attracting both users and advertising revenue compared to other social media platforms like Facebook (FB) and SnapChat (SNAP). Twitter recorded 328 million monthly average users (MAU) for the second quarter, a 5% growth over the same period in the previous year but flat compared to the figures for Q1 2017. A big blow was delivered by none other than Amazon (AMZN), when Twitter lost the rights to live stream NFL games to the tech giant in April.
  • Advertising Strategy: One component that a lot of analysts were looking out for was the advertising revenue which in the absence of a cogent monetization strategy acts as a measure of market confidence for Twitter. The company’s second quarter advertising revenue fell 8% year over year to $489 million, albeit a slight improvement from the 11% decline in Q1.
  • Outlook: The management is no help offering a rather bleak outlook. “We do not expect to see our total revenue growth rate improve in the second half of 2017 due to headwinds in the second half (of approximately $75M) associated primarily with de-emphasized revenue products. On a normalized basis (excluding the impact of these headwinds) we could see an improvement in total revenue growth by Q4’17,” it said in the shareholder letter.

Stagnant user growth is definitely the top priority for Twitter to fix, but that’s not the only thing that requires fixing. While the company is making a conscious push in to video, it needs to come up with a sound strategy to monetize its platform if it hopes to regain faith of investors over the long term.

Learn More: Short Selling Tutorial

 

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