Twitter Earnings: Focus On User Growth In Q1!

  • User growth slowdown could be a long term concern.
  • Large number of shares getting unlocked on May 6 could drag share price.
  • Twitter is overvalued when compared to its peers.

Twitter Q1 2014 Focus On User Growth

Microblogging site Twitter (NYSE:TWTR) is schedule to report its Q1 2014 earnings on 29 April. The company’s upcoming results will be watched keenly after user growth showed signs of weakening in its first earnings release since listing. We think the stock is overvalued at its current price of $46 a share, even if we were to ignore the slowdown in user growth.

Prior to its IPO late last year, had highlighted that the number of people leaving the platform could be a threat to Twitter’s long term prospects. While Twitter refused to comment, saying it was in a ‘quiet period’ ahead of its IPO, when they did announce their results, this little detail did show up loudly amidst all the noise.

The result was a near 25% correction in stock price on 6 Feb 2014. The company’s stock has corrected by close to 40% from its 52 week high at the peak of the post IPO frenzy throwing the spotlight on Twitter’s performance in Q1 earnings.

Earnings Guidance and Estimates

The company’s revenue guidance ranges from $230 – 240 million implying a 101 - 109% growth over Q1 2013 (YoY). While YoY growth is projected to remain exceptional, the guidance indicates the first sequential decline in Twitter’s revenue.

Analyst Estimates for Twitter peg revenue at $241 million (range: $231 - 251 million).

Twitter Revenue & Profitability

To sum it up, Twitter has never recorded a YoY growth of less than 100% in the last 8 quarters. It has doubled its revenue in every quarter, over the same quarter a year ago. As far as profitability is concerned, the company recorded its first Non-GAAP EPS last quarter, and that is about all there is to say about profitability @Twitter.

Twitter Quarterly Revenue and Profit Trend

What could worry shareholders!

The two main concerns for Twitter in Q1 will be a further slowdown in growth of User Base or MAU (monthly active users) and subsequently an impact on revenue growth. User Base is a key driver of revenue growth and revenue growth is probably the only driver of the company’s stock price.

So, even if Twitter records a blockbuster revenue growth, and that isn’t very unlikely, disappointing MAU growth will hurt the stock. Here’s how the MAU numbers has moved over the last 12 quarters

MAU Growth Trend

As we had highlighted in ourprevious article, the number of tradable shares will increase post Twitter lock-up expiry, from about 90 million shares to about 564 million shares, up six times. This could put the stock price under some serious pressure, especially if Twitter disappoints investors this quarter.

The company had mentioned last quarter that it is looking to add a private messaging function to its platform. This could be a handy addition, given that Twitter is a mobile friendly platform which generates about 75% of its ad-revenue on mobile.

The rumour has it that Twitter may be reconsidering its China presence. However, apart from the tough censorship norms that have blocked Twitter earlier, if it does actually intend to foray into China, Twitter will have to face tough competition.

Both Sina Weibo and Tencent Weibo, the Chinese versions of Twitter, have more monthly active users than Twitter does and are firmly entrenched in that market.

Twitter Valuation

While looking at Twitter’s valuations, one has to keep in mind three key points, Twitter’s slowdown in user growth, the potential slowdown in revenue growth, and the flood of shares that could hit the market on 6 May 2014.

Facebook Linked In Twitter
Price Earning ratio (PE ratio) 104.0 796.4
Price Sales ratio (PS ratio) 19.8 14.0 40.9

At its current valuation, Twitter is overvalued when compared to its peers. We think Facebook itself is expensive at a price to sales ratio of 20. However, given that Facebook is growing at a healthy rate of about 60% (Q4 2013) and can boast of a 20% net profit margin, we find it inexplicable as to why one should pay twice as much for Twitter based on their Price Sales multiples. View our Twitter stock analysis to see why we are bearish on Twitter stock.

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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