Twitter Post The Free Fall: Still Very Expensive!

Twitter Still very expensive post freefall

Down nearly 60% from its 52 week high of $74.73 a share, Twitter (NYSE:TWTR), at $30.6 a share, might come across as an attractive investment to the passive observer. However, do the math, and it’s easy to see how grossly over-valued this stock is, even after tanking by close to 21% in the last 2 days (6th and 7th May).

Let’s look at two of the most commonly used valuation metrics to understand how expensive this stock really is.

Twitter LTM Price/Sales Valuation

LTM stands for last twelve months of sales. Let’s assume two things:

  • Twitter continues to grow at 100% Y/Y (over the same quarter a year ago) every quarter.
  • Twitter’s price remains where it is today, at $30.6 a share.

Projection

Quarter

Q114

Q214

Q314

Q414

Q115

Q215

Q315

Q415

Revenue

250

278.58

337.16

485.4

500.98

557.16

674.32

970.8

P/S

21.8

18.6

15.8

12.9

10.9

9.3

7.9

6.5

So, if Twitter continues to grow at the rate of 100% Y/Y every quarter, and for some reason, every dollar of revenue translates to profits, an investor will have recovered his/her investment in the second quarter of 2016, 2 years and 1 quarter from now.

Going by Twitter’s trend in profitability though, after 2 years, you might still not have earned anything in terms of profits. Anyway, let’s stick the assumptions. Now the question is, does Twitter look like it is in a position to sustain a 100% growth over the next 9 quarters? Note that Twitter’s FY 2014 guidance assumes a growth of 80-88% for the full year.

Further, note that the price won’t actually remain at current levels if a growth rate of 100% is sustained. So, just in case the projected P/S multiples in the table look attractive a few quarters down the line, it’s very unlikely that they will materialize.

Doesn’t look too bright on this front. Let’s look at a P/E based valuation.

Twitter LTM Price/Earnings Valuation

Twitter being a loss making company cannot boast of a Price/Earnings ratio. So, let’s add one more assumption to our earlier assumptions.

  • Twitter net profit margins is 20%, starting Q2 2014 while continuing to grow at 100% Y/Y every quarter. We’re really generous, aren’t we?

Projection

Quarter

Q114

Q214

Q314

Q414

Q115

Q215

Q315

Q415

Revenue

250

278.58

337.16

485.4

500.98

557.16

674.32

970.8

P/E

N/A

N/A

N/A

198.8

54.5

46.4

39.4

32.3

After being as nice as we have, Twitter only manages to have a P/E ratio in the last quarter of the year. Further, it will reach a somewhat reasonable level by the end of 2015, which is when one should even consider buying this stock.

In the interest of clarity, growing at 100% Y/Y every quarter with a 20% net profit margin, it will take an investor 4.5 years to earn back his/her investment by way of profits.

This entire analysis of course, is based on fundamental factors. Some might opine that returns will come from betting on growth driven stock price appreciation, as many have since Twitter's IPO. However, how that could pan out is out there for everyone to see, and its increasingly difficult to draw comfort from that ideology.

Twitter user growth is declining

Twitter has not given us any reason to believe that they want to be profitable anytime soon. By when should one actually expect them to boast of a 20% net profit margin?

Further, we’ve assumed that it’s all hunky dory on the business front. However, that isn’t exactly true. A deeper look into twitter’s performance shows why there’s a big question mark over its future growth potential.

  • Improvement in user monetization is driving revenue growth and not user growth.
  • User growth and user engagement metrics show a declining trend.

Improvements in monetization rates (revenue earned per user) can’t compensate for weak user growth for too long. So, if the trend continues, Twitter’s revenue growth will be in trouble.

So, anybody who’s still gung-ho about Twitter might really need to re-asses their rationale. We have always been bearish on Twitter, and continue to remain bearish at its current price.

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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