Why has Twitter underperformed the market?

Which Is a Better Investment Now: Twitter or Digital World Acquisition?

Twitter is an established entity and Digital World Acquisition is a new entrant in the social media space, but which stock is a buy today?

In the past decade, social-media companies have gained significant traction, driven on the back of the worldwide shift towards digitalization. The easy-to-use platforms, as well as the opportunity to connect with or “follow” friends, families, and celebrities all over the world, acted as massive tailwinds for these entities.

Here, we compare an established social-media giant in Twitter (NYSE: TWTR) with a new entrant in Digital World Acquisitions Corp. (NASDAQ: DWAC) to see which stock should be a better investment right now.

Twitter: Bull v.s. Bear arguments

The world’s most popular micro-blogging platform, Twitter allows users to interact with each other by sharing information. It is an application used by several world leaders and celebrities to connect with their audience base easily.

Similar to most other social-media companies, Twitter derives a significant portion of its revenue from advertisements. In the second quarter of 2021, Twitter’s ad revenue was up 87% year over year at $1.05 billion due to increased enterprise spending and the reopening of economies.

Several discussion points, such as the ongoing pandemic, the Olympics, the rollout of vaccination programs, and the possibility of rising interest and inflation rates, kept users engaged at the global level in recent months. Twitter also disclosed that the company might monetize products such as Revue, which will diversify its revenue base and accelerate top-line growth going forward.

Twitter went public in November 2013 and has since returned less than 30% to investors in cumulative gains, grossly underperforming the broader market. However, the stock has gained momentum in the last five years, allowing it to almost triple in market cap since November 2016.

In Q3 of 2021, its sales rose 37% year over year to $1.28 billion, which was in line with estimates. However, Twitter reported a net loss of $0.67 per share amounting to $537 million, compared to a net income of $29 million in the year-ago period. While ad-sales account for 89% of revenue, Twitter’s top-line might be impacted by the sale of MoPub to Applovin in early 2021. MoPub is a mobile ad network, and this sale might lead to a revenue decline of almost $250 million for Twitter in 2022.

Digital World Acquisition: Bull vs. Bear arguments

Digital World Acquisitions Corp is a SPAC company that gained close to 500% in recent trading sessions. A key driver of this gain was the upcoming merger of DWAC with Trump Media & Technology Group or TMTG. The merger agreement has valued the combined entity at $1.7 billion, according to SEC filings. 

Further, TMTG’s business and future revenue will be tied to TRUTH’s success, a social-media platform backed by Donald Trump. TRUTH is expected to launch in Q1 of next year, making DWAC a high-risk stock, given it’s a pre-revenue company.

DWAC explained it would deploy $293 million in the merger, which will be used for product development and media ventures. But a social media company needs several millions of dollars to scale rapidly, indicating shareholder dilution is on the cards.

So, which stock is a better buy right now?

I believe Twitter is a much better bet compared to DWAC, given the former’s leadership position, established brand presence, and user base of over 200 million.

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