- Twitter could easily drop by another 25%+ if volatility keeps up in the markets and Wall Street continues to take a bearish view due to Twitter's user growth.
- $1 billion+ per year can be brought it from the monetization of the platform's logged out users
- The market cap cant drop continuously against rising revenues, as either a buyer will come in or value investors will start buying up Twitter stock.
Twitter (NYSE:TWTR) has had an awful start to the year with the stock down over 12% year to date. The stock is now trading just above $20 a share and in all earnest, the likelihood is that it will go lower. I have said repeatedly in my coverage that the S&P 500 experienced technical damage back in October of last year when it dropped to sub 1,900 and I believe we are at least going back there if not lower. When you take a look at the market over the last 15 years on a weekly moving average setting, it is evident that the market moves sharply down into a sharp intermediate bottom every 7 to 8 years. Furthermore the trigger for a sharp sell-off is a break of the 200 day moving average. When this has broken in the past, the market has dropped violently to the downside as shown in the chart below.
The line in the sand currently is 1,714 on the S&P500 which is still 200+ points from where the market is at the moment. A further 10% move lower to many may seem unlikely but we have this situation because the market is stretched way beyond its mean. I'm convinced the market will correct meaningfully (sometime in the next 6 to 18 months) and stocks like Twitter are going to get annihilated especially when you take into account its recent share price action. This then should present a great buying opportunity in the company for the following reasons.
Firstly the main reason why the stock lost almost 40% last year has been its sluggish user growth levels. Wall street currently seems to value companies based on the pace of signing up new numbers but I believe this valuation model will end soon especially if Twitter keeps on reporting strong top line growth every quarter. The social media company reported revenues of $569 million last quarter and is expected to announce $710 million on an EPS of $0.12 for the final quarter of 2015.
Bears state the Twitter's top line is slowing but if sales come in as expected, it will still be an increase of 48% over the final quarter of 2014. Investors shouldn't get hung on the bottom line. Amazon (NASDAQ:AMZN) has consistently reported negative net income totals in order to build the business which means that if Twitter posted robust user growth, bottom line figures would quickly be forgotten. In saying that Twitter's negative bottom line has been falling over the last 3 quarters (last quarter -$131 million) and the speed of getting earnings into the black should quicken when you take into account the 300+ people that were let go from the company last year. Research and development accounted for $207 million last quarter (on the expense side of the income statement) and as engineers were the primary sub-group that were let go, expect this number to fall in the quarters to come.
Apart from the inside team at Twitter doing an excellent job regarding the targeting of the ads, there is still plenty of potential for Twitter's revenue to grow meaningfully. You have Periscope and Vine which are still in their infancy regarding monitization but the main top line growth area (especially in the near term) is the monetization of its logged out users. Why?
Well these users make up over 500 million people that continue to visit the platform, but so far, Twitter hasn't made a red cent off them. Why? Well Twitter's objective has always been to sign up new users, as the perceived value of monthly active users is higher because of the higher engagement levels. Well Twitter has decided to ditch its former plan and I tend to agree with them especially as its logged out user count overshadows its total user base. If the number was smaller, it would be one thing, but we are talking about more than half a billion people here, that for whatever reason have decided not to sign up on the platform.
I have written previously how Twitter can also monetize these users, and even if Twitter only manages to eek out $2 (well over $6 presently from active users) from these users on an annual basis, you are talking about more than a billion being added to the top line yearly without much extra effort on the company's part. User or customer lists are what make online busineses' tick. Amazon and Facebook (NASDAQ:FB) epitomize this business model in that if you want to use their services, you must be signed up to their platforms. However the next most important component of online business success is traffic and Twitter has it in spades. Don't expect the company's top line to slow down any time soon.
Since earnings is in the red, I have always advised investors not to watch Twitter's price to earnings ratio. With the market cap dipping below $14 billion, Twitter's price to sales ratio is just under 7 compared to Facebook's 17.3. Furthermore Twitter's top line is still growing faster than Facebook's turnover despite its sluggish user growth. Another huge factor in Twitter's favor is the growing global e-commerce trend, as companies spend more and more on advertising revenue every year. Thirdly if the 10,000 character limit is rolled out, I think the pros outweigh the cons in the sense that the platform will be able to generate more unique text which search engines love for unique listings. This definitely will increase traffic over the long term and fears about core twitter users vacating the platform are over-hyped in my opinion as the platform will still be able to function as it is currently. Moreover user value (over $6 per year per user at the moment) should go up if people are tweeting longer messages as engagement levels will rise. This is another factor wall street is missing in my opinion.
To sum up, Twitter is still an attractive stock but it may fall more in the short term due to current volatility in the equity markets. However monetization of logged out users plus higher engagement levels should mean revenue growth should continue on a elevated path. This stock is still one of fastest growing (revenue-wise) stocks in the large cap tech sector. It will find a bottom and value hunters will be there is spades when it does so.