- Twitter's stock tanked by close to 9% on 10 Oct 2014.
- User growth issues still persist, albeit in a different form.
- Twitter valuations are expensive, making it a risky bet.
Twitter’s (NYSE:TWTR) stock fell by close to 9% on Friday, 10 October 2014. The recent correction has been triggered by the news that Twitter’s CEO Dick Costolo and his staff have received death threats from the ISIS. The severe corrections might come across as an opportunity to enter the stock once the issue settles down. However, there are still reasons to worry about Twitter’s user growth, a pain point for the company in its previous earnings releases. Further, at its current valuations, any disappointments in the company’s Q3 2014 results could trigger another correction.
Why Twitter’s Stock Tanked On 10 Oct 2014
Twitter’s stock tanked by 8.84% on Friday as news about the death threats issued to Dick Costolo and his staff surfaced.
Twitter has, in the past, been used as a medium of propaganda for various causes. On this occasion, the micro-blogging platform was being used by the ISIS to disseminate information about its activities. As per this report by the New York Post, Twitter had been regularly shutting down these accounts. As per the report, Twitter CEO Dick Costolo said that calls for the assassination of Twitter’s employees and management had been made in response to Twitter’s act of blocking these accounts.
In an interview on Fox Business, corporate risk consultant Paul Viollis expressed his belief that the ISIS would make attempts at hacking into the micro-blogging site’s servers. Concerns about the security of user related data could also be one of the reasons that dragged the stock.
Is Twitter A Buy Post The Correction?
The fact that these concerns will settle down eventually might make these corrections seem like investment opportunities. However, even after the seemingly convincing latest earnings release, all might not be hunky dory at Twitter.
In spite of its exceptional revenue growth, Twitter’s stock price fell sharply following its first two earnings announcements since its IPO. The prime concern was user growth, which appeared to have been fixed in Q2 2014. However, that’s not entirely true.
Twitter User Growth Concerns
In Q2 2014, Twitter registered its second consecutive uptick in absolute user addition (quarterly). The site added 16 million MAUs (monthly active users), its highest in the preceding 4 quarters. The company’s revenue growth of 125% YoY remained as solid as ever, with marginal acceleration in the growth rate. The result was a 20% jump in stock price, the day after the earnings release.
The stock is now up by close to 33% post its Q2 2014 results. However, Twitter’s user growth isn't as great as it appears to be, since some of its users access the site through third party apps only.
As we had highlighted in our coverage of Twitter’s user growth concerns, the user base to which it can serve ads is actually about 241 million MAUs, as opposed to its total MAU base of 271 million. However, Twitter’s valuations have kept rising in spite of the fact the problem still persists, albeit in a different form.
Even after the heavy correction in stock price, Twitter’s Price to Sales ratio stands at close to 32. Even with the company’s exceptional revenue growth, that’s very expensive.
The company recently announced the pricing of two of its convertible notes offerings of $900 million each. The combined cost of the two issues translates to an interest expense of about $22 million per annum.
Twitter hasn’t made any profits till date. The company’s Adjusted EBITDA guidance for year stands at about $230 million on a revenue of $1330 million ($1.3 billion). That implies an Adjusted EBITDA margin of about 17.5% for FY 2014. However, given its high net loss margins (46% in Q2 2014), it’ll be a while before the company reports net profits.
At its current valuations, any negative outcomes from the earnings release later this month could trigger further corrections in the stock price. Our Twitter stock analysis assigns the stock with a sell rating.