Twitter: Long Term Risks Overshadow Solid Q1

  • Twitter delivered a solid Q1 with all round improvement.
  • Monetization has improved but tepid user growth and engagement threaten long term growth.
  • Twitter is overvalued and could continue to correct further.

Twitter Long Term Risk Overshadows Solid Q1

Twitter’s (NYSE:TWTR) stock price is down about 10% following the company’s Q1 2014 earnings release on 29 April. While the company beat revenue and EPS estimates to record an arguably good quarter on the whole, a deeper look at some of its metrics reveals why investors are disappointed with Twitter’s latest numbers.

While Twitter’s improved monetization rates continue to propel its performance in the short term, its user growth and engagement metrics don’t inspire confidence in the company’s long term prospects.

Twitter Q1 2014 Key Financials & Metrics

  • Revenue: $250.49 million vs $241 million (average estimate)
  • Adjusted EPS: $0.00 vs $0.03 (average estimate)
  • Monthly Active Users (MAU) in millions:
      • 255 vs 241 in Q4 2013 - sequential growth 5.8%
      • 255 vs 204 in Q1 2013 - Y/Y growth 25%

Twitter Revenue and Profit Trend

Twitter continued to exhibit spectacular revenue growth in Q1, growing at 119% Y/Y (over Q1 2013). The company beat its own guidance of $230 – 240 million apart from beating analyst estimates. What’s more noteworthy is that Twitter did deliver a small surprise in terms of profitability as well, beating estimates with a positive Non-GAAP EPS. In GAAP terms, Twitter recorded negative margins of (52%) and (53%), largely on account of stock-based compensation expenses.

Twitter’s user base recorded its first up-tick in 4 quarters and improvements were also seen in other metrics like timeline views, timeline views/MAU (marginal sequential improvement).

On the whole, Twitter recorded a strong quarter in terms of revenue growth and showed improvements across the board. However, it hasn’t managed to ward off concerns pertaining to its long term growth potential.

Twitter: Long Term Concerns

Twitter’s stellar performances have been driven largely by consistent improvements in user monetization rates. Let’s look at how Twitter’s monetization metrics have progressed in Q1 and in the last 8 quarters.

  • Ad-revenue/thousand timeline views: $1.44 - sequential growth (3.4%), Y/Y growth 95%
  • Quarterly Revenue/Average Monthly Active Users: $0.98 – sequential growth (0.02%), Y/Y growth 75%

Twitter Monetization Metrics

While improved monetization is great news, it’s not enough, especially if user growth and user engagements are looking in the other direction. Over the long term, a strong user base is an absolute necessity for a social media platform. Let’s look at the trend in Twitter’s user related metrics.

Twitter User Growth Trend

We’ve highlighted the concerns around Twitter’s tepid user growth for a while now. One look at the graph tells you in which direction these metrics have been heading. Further, though user growth has improved in Q1, one must note that user growth typically spikes in Q1 every year and is followed by a slide in the subsequent quarter. How things will pan out on this front remains to be seen; however, this graph doesn’t inspire confidence.

Twitter’s user engagement metrics also tell a similar story. Here again, a spike in Q1 has typically been followed by a drop for the rest of the year.

Twitter User Engagement Metrics

If one were to be optimistic, one would have to say it’s too early to call if these metrics are taking a U-turn or simply going about their yearly routine.

Twitter Valuation

To sum up Twitter’s Q1 2014, while improvements were visible on most counts, the sword still dangles over Twitter’s long term story.

Even after a massive 10%+ correction, at its current price of $38.26, Twitter trades at a Price/Sales multiple of 27.2 which is far higher than even Facebook’s 22. If one were to be lenient and value Twitter based on Facebook’s price to sales ratio, Twitter would be priced at $30 a share, 20% lower than its current price.

Even considering Twitter’s FY 2014 guidance of $1.2 – 1.25 billion, the stock is priced at 17 – 18 times FY 2014 sales, which is still quite expensive given the fact that Twitter is not even profitable. Check our Twitter stock analysis

Further, with the upcoming lock-up expiry which will increase the number of tradable shares by 6 times, Twitter’s stock price might be putting its glory days behind it.

To see Twitter’s latest stock price movement, click here (NYSE:TWTR)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and TWTR stock

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Tomislav Brdar
bullish
for the bull case, perhaps the P/S on 2015 is about 1-2 points above FB which might be lowish.
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