Even after a sickening 20% drop in Twitter stock on Friday ( July 27), TWTR still looks significantly overvalued particularly when you look at the causation for the drop and then compare TWTR to other social media plays that have higher growth rates, more products and diversification and therefore less risk.

A sharp decline in user growth

TWTR’s latest quarterly report shows a sharp deceleration in monthly and annual user growth. Monthly active users were 335 million --a decline from 336 million in the first quarter, San Francisco-based Twitter said Friday in a statement. Though that measure was up 2.8 percent from a year earlier, the company expects monthly visitors to fall again in the current period. One of the most important drivers of growth for TWTR is now nil. When revenue growth sputtered and flatlined in 2016-17 TWTR swooned over 40% from a high of $25 to $14.The forward delta of TWTR’s revenue growth was expected to decay in the next several quarters even before this negative guidance.

Gross margin pressures are increasing

Twitter will have to invest in increasing its marketing and sales efforts to reinvigorate is the top line growth rate of monthly and daily users which seems to have hit a plateau.

Fake accounts purge: Reported by the Washington Post to be over 70 million, or nearly 20% of TWTR’s base, is a wake-up call to current advertisers to carefully review their r social media purchase options. This will likely pressure operating margins and pricing for Twitter from its currently lofty levels of 70%.

Fake accounts for an ongoing problem

Your humble scribe has been a victim of fake accounts and identity theft on Twitter and has tried numerous times to have them shut down and was rejected. After many unsuccessful attempts to reach human ears, a meager complaint was lodged with the Better Business Bureau.

Such fake accounts create higher barriers to filter out fake accounts to get back to adding “real” accounts, again adding to the cost of goods sold.

Significantly higher marketing costs and increased investments in product development, combined with higher hiring cost for personnel to filter out fake accounts juxtaposed by a declining top-line growth rate will no doubt crimp Twitter's attractive gross margin significantly.

Cost of Thought Policing

Positioning themselves as the Arbiter or police of acceptable free speech is a no-win proposition.

With the country divided they are bound to upset up to 50% of their audience at any particular point in time by intervening as a referee in thought Patrol.

They would be much wiser to sit back as a utility and allow free discourse and ban only obscenities, vulgarities and hate speech strictly defined.

Government officials are considering bringing legal action against Twitter for unequal treatment and suppression of political views it deems unacceptable.

Overvalued vs. Peers

Valuation exceeds resetting of current growth expectations.

TWTR is priced at a huge premium to social media peers Google and Facebook. 

*Based on the above it would not be terribly surprising for Twitter to experience 30% to 50% further decline in its market price before it would reach fair value.

If you compare recent quarter revenue growth rates of TWTR’s 24% to GOOG’s 26% and FB’s 42% and TTM EV / EBITA of 54 vs21 forAlphabet (GOOGL) and 17 forFacebook (FB), the combination of lower revenue growth and valuation premium of over 60% is startling. If we value TWTR 12 FTM EV/ EBITA, the average of its peers, we find fair value at $17. Tweeter dee, Tweeter dum.