Has Twitter Stock Bottomed Out?

  • Twitter stock has been rallying strongly over the past one week.
  • Positive sentiments by Wall Street post Q4 earnings have been helping out.
  • Have we seen the bottom for Twitter stock after the severe hammering in 2015?

Twitter (NYSE:TWTR) stock has been rallying strongly over the past one week after the company received mixed ratings from the Street following its Q4 earnings release. Most of those recent ratings issued significantly higher price targets for the Twitter stock than its current price.

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Source: CNN Money

Bullish & Bearish Voices About Twitter Stock

The most notable bear call was by Pac Crest’s Evans Wilson who termed the confirmation of erstwhile interim Twitter CEO Jack Dorsey as the permanent CEO an "end of the hope trade." Evans questioned whether Dorsey would be able to implement Twitter’s five-point plan including fixing confusing elements on Twitter’s user interface, connecting more people with influential groups, video integration, and improving developer ties all in a bid to bring in new or lapsed users.

The most notable bullish call was by SunTrust’s Bob Peck who had this to say about Twitter:

"We think management articulated a cogent vision for the company that makes us cautiously optimistic. However, if the plan does not materialize in user growth we think there are 3 scenarios that help provide investor support: 1) Costs cuts to align with reduced growth trajectory; 2) ARPU growth alone can support near term expectations; 3) M&A math supports higher valuations."

Another notable bullish call was by Monness Crespi's James Cakmak who pointed out that Twitter’s ad revenue was still growing at a healthy clip despite the company’s active MAUs having stagnated over the past three quarters or so. Twitter’s ad revenue (90% of overall revenue) increased 48% Y/Y and 16% Q/Q despite a 41% decline in ad pricing driven by a huge 153% increase in ad engagements.

Market Beginning To Focus On New Growth Initiatives

Twitter stock has come under intense pressure over the past one year as the company’s MAUs remained stuck at 320M. The natural assumption by the market was that Twitter could not keep on juicing more and more dollars from a stagnant or, worse still, contracting userbase. But Twitter’s growth has not slowed down as much as feared despite its user growth problems. Twitter’s revenue grew 48% during the fourth quarter and 58% for the full year which is strong growth by almost any count.

A stagnant userbase certainly is a problem for a social media company because a company that finds itself in such a situation is unable to command better ad pricing for its ads. In the case of Twitter, its ad pricing declined 41% during the last quarter. But that decline can only be partly pinned on Twitter’s stagnant user base while the rest can be chalked up to auto-play video ads that Twitter has been implementing, since these carry lower CPM rates. Twitter reported that video views increased 220x Y/Y during the fourth quarter.

However, MAU growth is just one of the tenets of MACE analysis that is used to work out ad revenue for social media companies. The other three are: change in ad load factor, change in CPM rates, and change in engagement per user. Twitter has lately been growing its ad revenue through a big improvement in user engagement.

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Source: Business Insider

Twitter made some key announcements during its last earnings call that could lead to even further improvements in engagement rates on the platform.

During its fourth quarter earnings call, Twitter outlined some measures to improve user experience on its platform:

"We are going to fix the broken windows and confusing parts, like the .@name syntax and @reply rules, that we know inhibit usage and drive people away."

The company also said that it will continue focusing heavily on video integration. Videos are great at increasing user engagement.

But perhaps the most important development that Jack Dorsey has announced since being confirmed as permanent Twitter chief is monetizing logged out users. Twitter has 320 million MAUs, and another 500M non-active users. Twitter started displaying ads to logged out users in select markets during the final part of the year and plans to gradually roll out the program to other markets. Twitter estimates that it can monetize logged out users at roughly half the rate compared to its active users. This implies that Twitter can grow its revenue base by almost 80% if its can successfully monetize all its logged out users.

Time to Buy Twitter Stock?

It appears as if the market has finally started cutting Twitter some slack and focusing more on the company’s new growth initiatives instead of focusing solely on its MAU problem. Twitter has continued to grow at a healthy clip despite a slowdown in the acquisition of new users, and can still continue growing by monetizing its large non-active user base and increasing user engagement via video integration on its platform. The biggest risk for Twitter stock right now would be if the company missed earnings estimates down the line, since that would revive fears around the company's future. However, Twitter has a pretty good track record of exceeding earnings estimates. This limits further downside to Twitter stock, which is down 21% YTD and 62% over the past 12 months. Long-term investors should consider buying now.

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