- Sentiment has become ultra bearish on Twitter. With a top line close to $3 billion and growing, this usually means a firm bottom is close.
- Monthly active users actually grew in the first quarter. If the street sees more of this, it will definitely reprice the stock higher.
- The tech sector has outperformed the S&P500 since 2009. I believe this will continue which will act as a tailwind for Twitter.
Twitter (NYSE:TWTR) stock is currently trading at around $14 a share and many believe that the company's recent set of earnings numbers (which tanked the stock from north of $17 a share) will mean even lower share prices for the tech company in 2016. Why? Well, recent surveys that track advertisers interest on internet platforms illustrated that advertising interest has reduced on Twitter, as companies prefer to spend on other platforms such as Facebook (NSDQ:FB) and Snap-chat. The bears' argument is that advertisers have had plenty of time to calculate return on investment levels on Twitter and thus far, other platforms are producing better returns. However, I don't see this argument to be so clear cut like the bears do. Firstly, internet advertising is still in its infancy and will continue to take market share off traditional sources of advertising. Here Twitter most definitely has a tailwind behind it. Secondly, although transaction type companies such as Priceline (NSDQ:PCLN) spend a huge amount of their advertising dollars online, video advertising for brand names for example, still hasn't taken off, which will mean more advertising dollars for Twitter going forward.
I have stated in previous articles that Twitter's price to sales ratio was the one valuation to watch and now the sales multiple stands at 4.2 which is well behind the industry average of 7.4. Even though sales growth slid meaningfully in the first quarter (36%), revenue still came in at $595 million. Now just so investors know exactly where we stand at present, let's compare 2013 metrics to where the stock stands today. In fiscal 2013, Twitter reported revenues of $665 million and its stock was trading at $69 at years end. Currently, the stock has a trailing twelve month top line of $2.37 billion but the stock is trading at $14. The problem isn't an increase in the float but poor guidance which Wall Street took very negatively after first quarter results were announced. Twitter is projecting only $600 million in revenues next quarter which will only be around a 20% hike from the same quarter in 2015. However in this industry (where e-commerce is undoubtedly in a strong uptrend), Twitter has to find a floor in the near term if sales keep expanding and I'm betting that the floor is not that far away.
Now despite the stock trading at its lowest levels since its IPO, its monthly active users are still growing and actually reached 310 million in the first quarter. This was a nice bump up from the fourth quarter last year but Wall Street didn't take much notice. Now, irrespective of the alleged withdrawal of advertisers from the Twitter platform, if users continue to increase, markets will undoubtedly return. Further, Wall Street is not "buying into" the Twitter growth story which can be seen by top line estimates for both, this year and next. Revenue is now projected to come in at $2.75 billion in 2016 which in $200 million down on original expectations. Now I believe that Twitter can beat the projected $2.75 billion because it has a multitude of live events (Presidential campaigns, NFL, etc) taking place at the back end of the year. Here is where engagement levels can be substantially improved and where Twitter has an edge over its competition regarding live events.
Also, I believe the stock is going to be helped by a rising stock market and this is important not only from a share price point of view but also in both attracting and keeping top talent. Stock options are usually a big percentage of a highly paid employee's remuneration package, so a rising share price is essential from this perspective. Furthermore, I believe that US equity markets will bottom soon and embark on a brand new cycle which should see indices at all time highs over the next 6 to 10 weeks. Now many will say that a rising stock market won't do much for Twitter stock, but I disagree. Why? Well I have noted already how its sales multiple is substantially lower than the industry average and the longer Twitter's sales increases don't affect the share price, the more value investors will start seeing into this stock.
To sum up, Twitter has many factors in its favor at the present moment despite its poor outlook for the second quarter. It's sales multiple continues to tumble despite the company continuously growing its top line quarter over quarter. Furthermore, expectations have been lowered which should enable the company to report some top line beats in the forthcoming quarters. Add to this rising monthly users and a rising stock market (which I predict in 2016) and it's quite probable that value investors will start investing here, especially if the stock continues to get punished throughout 2016.