- Periscope and Moments have the potential to convince Wall Street that engagement levels (which lead to more revenues) are as important as user growth numbers.
- Twitter has decided to monetize its logged out users in a different way in Q4. Expect to see elevated revenue growth.
- Watch the company's price to sales ratio. The more its market cap diverges compared to its sales, the more smart money will enter here.
Twitter (NYSE:TWTR) now seems to be approaching $20 a share as the shorts seem to be out 0f force. Twitter stock is down over 32% year to date and although there may be more carnage to come (probably when the company announces Q4 results at the end of January), I do feel this stock will eventually find a floor. The company now has gone from a market cap of $20 billion+ to a present market cap of just over $17 billion in just a few months. This will lower the company's price to sales ratio which is the only true fundamental metric we can use to value this company, as earnings are still in the red. I have mentioned in recent article that the lower the price to sales ratio goes, the more I will be looking at Twitter as a value play as long as its revenues keep increasing at 50 to 60% growth rates. This is something that Twitter bears are missing in my opinion as they are just looking at the company's sluggish user growth rates. Twitter's current user number is about 307 million when you exclude SMS fast followers which is terrible growth when you compare it both to Q2 of this year (1% growth rate) and Q3 last year (8% clip). However, revenue grew by 57% on a rolling year basis to $569 million, which also was a 13.3% increase on Q2. What these figures tell me is that Twitter doesn't need explosive growth in its user base in order to keep growing meaningfully, but rather stable, consistent growth. If it achieves this, then revenue growth rates will continue, which has to impact the bottom line.
The longer wall street takes a bearish view on the stock despite rising revenues, the more and more value investors will start to become interested. I say this because not all users are the same. For example 300 million users who are actively engaged means the platform can distribute more ads than 400 million who don't spend meaningful time on the platform. Furthermore what could really change this conversation is Twitter's "Periscope" which currently has over 10 million users and 2 million daily active users. Twitter hasn't begun to monetize this platform yet, as it is concentrating on growing numbers but once it does, it could be a big eye opener for Wall Street. Why? Well I believe these users will be engaged which means ad revenue should be much higher than pure text based platforms. "Moments" should increase engagement levels also but since this program is currently working within the main Twitter platform, its metrics may not be easily distinguished for analysts. In any event, both initiatives look promising for Twitter and should increase engagement and make people sign up for new accounts over time.
What is interesting about the 4th quarter is that Twitter for the first time in its short history is going to concentrate on monetizing its logged off users. Twitter's logged off users total 500 million but up to now, the company's objective was to convert them into active registered users. Why? Because an active user is worth more to an advertiser because it is easy to track his or her interests. This is where " Moments" can really have an effect on logged out users as it can attract hoards of logged off traffic for important events. Bears point to the fact that the traffic Moments will generate will not be targeted which means it wont attract advertisers on mass, but I disagree. The sub-categories for the main categories ( News, Sport Entertainment & Fun) are plentiful which means that advertisers have scope to target their ads here. Even if logged off users only command 30% of the premium core users command, they are still going to move the top line meaningfully here as you are talking about an audience of over 500 million visitors. Therefore I wouldn't be surprised if Twitter easily beat the soft guidance on revenue for the fourth quarter this year.
To sum up, I believe if Twitter falls below $20 a share in the near term, you are looking at the stock with a price to sales ratio of around 6 and a market cap close to $13 billion. This looks very cheap for a company in this sector with sales that will top $2 billion a year shortly. Despite Twitter's present struggles to add users, it is operating in an industry with excellent fundamentals. Smart money knows this, which I why see a floor not far from its current valuation.
You can see Amigobulls' Twitter stock analysis video for a quick roundup of key financials, valuations and more.