Why Shankar Sharma bets on this stock

By Morningstar |  26-10-16 | 
 
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At the Morningstar Investment Conference held last week, Shankar Sharma, the vice chairman and joint managing director of First Global, shared his stock picking strategy.

In a riveting and engaging manner, so typical of him, he explained why he courted Apple, Amazon and IndusInd Bank when they were still the ugly ducklings of the market. You can read all about it here.

But what was really interesting is his take on the Twitter stock.

Rumours began early October this year that Twitter’s board was meeting with potential bidders: Google, Apple, Walt Disney, Salesforce. That drove the stock price up, but it began to slide as one-by-one the contenders dropped. Now the price has once again jumped on news of Walt Disney Co. showing a renewed interest.

When the stock was listed on Nasdaq in 2013, it opened at $45.10, peaked at $50 and closed at $44.90. Today it is trading at around $17.

Meanwhile, the company plans another round of layoffs. The company is struggling to grow top-line results, and in the second quarter of the year reported a net loss of $107 million, which is an improvement over a net loss of $136.6 million in the year-earlier period. Also, the company posted quarterly revenue of $602 million, up 20% year-over-year.

Shankar Sharma on why Twitter meets the test of what looks like a great bet.

  • The company has very little debt.
  • Twitter has a market cap of around $12 billion, with $3 billion in cash. So the net market cap is around $9 billion.
  • The market cap is less than Flipkart's market cap. EBITDA is $600 million, runs at about 25% EBITDA, which is terrific by any standards.
  • Free cash is about $600-700 million every year so it’s not a cash-burning tech company. It is a solid company, with a solid EBITDA, and a solid free cash flow. Below EBITDA they have only depreciation and stock compensation losses. So actually it shows a loss at the bottom line, but that's basically some element of depreciation and a big element of the stock options that they have granted, which is being expensed out.
  • So, in reality, Twitter is actually - as far as any reasonable method of profitability is concerned - a profitable company. It is not a basket case company by any standards.
  • Stock is near all-time lows from the time it listed.

Comparison with Snapchat

  • Snapchat is coming out with an Initial Public Offering, or IPO, probably in March 2017 and is looking at a $25 billion valuation. The market capitalisation of Snapchat is $25 billion versus $10-13 billion for Twitter.
  • Snapchat has 15 crore subscribers versus 35 crores for Twitter.
  • Snapchat has $300 million in revenue versus nearly $3 billion for Twitter.

So while the number of subscribers is just 2x, the revenue is 10x. That tells you how much more Twitter milks its subscribers when compared to Snapchat.

  • Snapchat is very American-centric with a limited sphere of influence. Twitter, on the other hand, has a vast sphere of influence. It's a global play. The news that gets broken on Twitter is much faster than any other media platform in the world.

With the U.S. elections coming up, the 2019 elections in India, sharp increase in extreme rightwing politics across the world – India, U.S. and Europe. And in fact, not just extreme rightwing, you are seeing extreme politics coming in, so centrist politics is out, whether it's a rightwing that's being replaced by left, whether it's left being replaced by right, people want the incumbent out.

When you have such an environment– and I see that continuing for a long time worldwide – Twitter is the only place where you can vent, you can troll, you can go and attack your opponents. Where else can you do that? Not on Facebook.

So, my case is that trolling is great. It will add subscribers and I think before the 2019 elections, there will be huge trolling for all people going to participate. So, India will, in my view, contribute another 10-15 crore subscribers, if not more, to Twitter.

Where else can a troll army be assembled as easily as on Twitter? There is no other platform in the world.

Shankar Sharma explained this in context of his 5-point criteria which he uses to select potential multibaggers. This stock qualifies.

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