- Twitter is estimated to record a revenue of $217 million.
- Operating losses and share dilution should be a concern for an investor.
- Twitter stock is overpriced.
It is show time for the little blue bird that flew in to the markets, November last year, raised funds via a much talked about IPO and ended up about 1.82 billion dollars richer. At 232 million monthly active users (MAU) of which 43% or 100 million users are active daily and share 500 million tweets every day, (NYSE:TWTR) Twitter, which added another dimension to social networking, is quite phenomenal to the casual observer. However, that alone may not be enough to engage the keen investor. We look at Twitter’s journey so far and what to expect ahead of its very first earnings release post IPO on 5 Feb 2014.
The company has registered staggering revenue growth rates over the last 8 quarters and has clocked an average YoY growth of above 120% for the last 4 quarters. Though such a high growth rate is unlikely to be sustainable and is already on the decline, as things stand, things are very healthy on the revenue front. That said, when it comes to profits, the company hasn’t seen a single quarter of operating profits, with operating costs stuck at a stubborn %age of revenue; and this is likely to continue given that Twitter will continue to spend heavily on R&D and Sales & Marketing.
|% of Revenue||Q4 2011||Q1 2012||Q2 2012||Q3 2012||Q4 2012||Q1 2013||Q2 2013||Q3 2013|
|Revenue (in million $)||41.20||54.31||68.04||82.32||112.25||114.34||139.29||168.58|
|Cost of revenue (as %)||49||51||45||41||33||36||36||37|
|R&D (as %)||50||35||40||39||36||42||46||52|
|Sales & Marketing (as %)||24||27||29||29||26||28||32||36|
|General & Admin (as %)||39||25||26||17||13||15||13||13|
|Operating costs (as %)||161||137||139||126||108||121||128||138|
|Net loss (as %)||-63||-40||-41||-26||0||-24||-30||-38|
At 232 million Monthly Active Users (MAU) for Q3 2013, Twitter’s MAUs have grown by 39% over the corresponding period in 2012. Currently 70% of the advertising revenue is generated by mobile devices. The average revenue per user which saw a dip in the first quarter of the year, has grown at a rather stable growth rate for the remaining two quarters ending September 2013. A healthy MAU growth rate and improved monetization of their user base is critical for Twitter which lags far behind a competitor like Facebook in terms of MAUs as well as revenue per user.
|Q4 2012||Q1 2013||Q2 2013||Q3 2013|
|MAU (in millions)||185||204||218||232|
|Absolute change (in millions)||18||19||14||14|
|QoQ change (in %)||10.8||10.3||6.9||6.4|
|Revenue per user (in $)||0.61||0.56||0.64||0.73|
|QoQ change (in %)||23.1||-7.6||14.0||13.7|
Investors will also be keen to understand how the acquisition of MoPub, the mobile advertisement exchange will contribute to advertising revenues given that ad revenues constitute close to 90% of Twitter’s total revenue.
Estimates are that Twitter will record a revenue of $217 million. If it does manage to do that, it will have recorded yet another quarter of solid revenue growth, with the growth rate standing at 29% over the previous quarter (QoQ) and 93% (YoY) over the corresponding quarter last year.
More in focus, however, will be the movement in its profit/loss at an operating level and its cash flow from operations, which has turned positive, and barely so, only in this financial year. Also in focus will be the growth that Twitter exhibits in its MAU, revenue per user and mobile users’ share of revenue, all of which are critical to the company’s performance going forward.
Twitter Company Valuation
From an investors perspective, what we would really like, is to be able to find a rationale for the sky high valuation that Twitter has managed to attract. As we've maintained for a while now, at anywhere close to its current price of $65 per share, our Twitter stock analysis suggests that Twitter is just very very expensive. Since it has had operating losses and net losses all along, a price earnings ratio (P/E ratio) or Price/Operating Income ratio comparison does not mean much. However, in spite of its robust revenue growth a price to sales ratio comparison highlights its mispricing quite effectively.
|Price to Revenue||Twitter Q3 2013||Twitter Q4 2013 Est.||Facebook Q4 2013|
|Market Cap on Feb 04, 2014||36,230||36,230||150,000|
|LTM Revenue (in million USD)||534.46||639.21||7,872|
|Price to Sales ratio (per share)||67.79||56.68||19.05|
Based on the data from Q3 2013, at today’s price of $65 per share, the stock is trading at a price to sales ratio of 67.79 vs Facebook’s 19.
*Assuming that the stock price remains the same, Twitter meets analysts’ revenue estimates of $217 million in Q4 2013, taking the revenue for the year to $639.21 million, and goes on to double its revenue again next year, it will still be trading at a price sales ratio of about 28. This at a time when Facebook has 1.2 billion users and about double the revenue per user, and off course, burgeoning operating and net profits.
To top it all, there’s another cause for concern for a shareholder. Dilution! The number of shares outstanding is likely to keep on increasing in the immediate future as a result of stock options, RSUs, Warrants and payments for acquisitions in the form of stocks. In this scenario, an investor is very likely to share with more and more people, earnings that are not even there.
|as of Sep 30, 2013||Current outstanding shares||At the time of IPO||Vesting of stocks upto 2016||Total shares (in 2016)|
|Fresh issue of stocks (in IPO)||70.0||70.0|
|RSU's upto Sep 2013||11.87||73.79||85.66|
|RSU's granted after Sep 2013||7.2||7.2|
|Mopub acquisition (common stock to be issued)||14.8||14.8|
|Common stock to be issued further under 2013 plan||80.3||80.3|
To sum up, even if Twitter meets Q4 revenue estimates, and we leave aside equity dilution and other aspects like operating losses, for it to be comparable with Facebook on valuations, either Twitter’s stock price has to be a third of what it is, implying a price of about $22-23 per share, or its revenue has to move up 3 fold. At the current price, there seems to be hardly any reason to invest in Twitter, and when we find one, we will be happy to tweet about it!
To see Twitter’s latest stock price movement, click here (NYSE:TWTR)