Twitter and The Headwind of Shareholder Dilution

Excessive Stock Compensation and Soaring Expenses Hurt

There are many ways to lose money in an investment. But one of the most pernicious avenues to underperformance is via share dilution. It’s like the silent killer of shareholder returns. And this is where I sheepishly turn to Twitter (NASDAQ: TWTR), a company and stock I have previously been bullish on. I first wrote the company up in a deep dive report when the stock was at $29.88 per share.

Almost everything in my thesis started to play out. The company improved their ad technology, improved results, worked on technical debt and started introducing subscriptions. The company also improved their cadence of new product offerings.

But growth in revenue alone doesn’t make a great investment. And Twitter shareholders have been beset by two problems. The biggest problem is that Twitter has an issue with stock-based compensation. These are stock and option grants that the company gives employees as part of employees’ overall compensation.

In 2020, Twitter spent $474 million on stock comp expense. In 2022, it is forecasted to be $900 to $925 million. In other words, stock-based comp expense has doubled in two years and now is approaching $1 billion a year on a $28 billion company. Consider that the fully diluted share count has increased 8% in just 18 months since I invested!

This by itself would be ok since the company grew revenue by 37%, but it is not just stock-based comp that jumped, but also overall expenses jumped 30% as well. The combination of shareholder dilution and a lack of operating leverage is a killer. Technology companies should benefit as revenues soar, but mysteriously the cost of running Twitter keeps jumping right along with revenue growth.

And so, after a ton of excitement for the company turning around, I’ve decided to step to the sidelines. I’m not really interested in investing in a company that is diluting my ownership interest while at the same time allowing soaring operating expenses.

Twitter remains an acquisition target and could easily be acquired like LinkedIn was by Microsoft. But being an acquisition target alone is not enough in a stock market where opportunity abounds.

Any investment has an opportunity cost and at a time when so many other investments like many of my cannabis stocks have such compelling upside, I simply can’t afford to be diluted like this. In the end, it’s hard enough in this market without competing against the headwind of shareholder dilution. I guess I will just have to enjoy Twitter as an active user!