Twitter Inc: How To Play TWTR Stock Ahead Of Q3 Earnings Tomorrow

  • Twitter Inc is now due to report Q3 earnings at 7 A.M. EST (4 A.M. PST) on 27th October.
  • Q3 earnings could make or break Twitter, but existing shareholders could potentially benefit either way.
  • Should you buy Twitter stock going into Q3 earnings?
Should You Buy Twitter Inc Stock Ahead Of Q3 Earnings

San Francisco, California-based Twitter Inc (NYSE:TWTR) is now due to report its Q3 earnings before markets open on October 27, and not after markets close, as was scheduled earlier. Twitter's Q3 earnings release could turn out to be a pivotal moment in the company's history, and the micro-blogging site is well poised going into earnings. However, given the amount of buyout speculation, there's more to this earnings release than just the numbers alone. Should you buy Twitter stock ahead of its Q3 earnings release?  But first, let's look at the numbers.

Don't Bother With Analyst Estimates

You probably shouldn't bother if Twitter marginally beats analyst estimates or even its own guidance for that matter, because both of those numbers set the bar very low for Twitter. Analysts expect Twitter to report $606.5 million in revenue for Q3, implying a YoY (Year-On-Year) growth of 6.5%. Twitter's own revenue guidance of $590-$610 million, projects YoY growth in the range of 3.6%-7.2%. If you own a stock that just ran up 7% on buyout rumors, those are not the kind of numbers you want to see. Just to put things in perspective, prior to Twitter's Q2 earnings release, analysts expected the micro-blogging site to report a revenue of $678 million. If Twitter can deliver something even close, it'll get everybody to sit up and take notice.

Analysts expect Twitter to report a non-GAAP Earnings Per Share (EPS) of 9 cents, which is lower than the 10 cents it reported a year ago, and Q2's 13 cents a share. So, that's not flattering either. That said, a beat on this front will be most welcome. In the absence of serious growth, improved profitability could definitely help Twitter. The micro-blogging site would also do well to curb its stock-based compensation expenses, which it expects to come in at $165-$175 million.

3 Key Metrics To Watch In Twitter's Q3 Earnings Release

According to a report on Bloomberg, Twitter plans to cut its workforce by about 300 people, or 8%. Job cuts are always unfortunate, and they're often the last resort. Understandably, such a move could be interpreted pessimistically, as Twitter's inability to do something else to salvage the situation. That said, if you're an investor, and given that Twitter's platform hasn't undergone any earth shattering user experience or product changes, you'd probably think that Twitter is letting go of resources it doesn't need or can't justify paying for.

The second number to watch closely is Twitter's Free Cash Flow (FCF) number. Twitter has done a few things right in Q3, the foremost being its increasing focus on, and arguable success in live video content streaming. We discussed in detail why Twitter's recent wins in the live streaming space could signal a turnaround, and we won't list down all of that again here. But the point is, live streaming is probably Twitter's best chance to turn things around, and its gradual progress on this front hasn't gone unnoticed. What that means is that Twitter will need to compete with the likes of Disney's (NYSE:DIS) ESPN, Amazon (NASDAQ:AMZN) and of course, Facebook (NASDAQ:FB) for big opportunities, like the one we covered recently. What do all of these companies have in common? Deep pockets. And to compete effectively, Twitter needs to generate free cash flows and get its war-chest in good shape. Twitter has now reported positive free cash flows for three quarters on the trot, and a fourth will definitely make things better.

Last, but probably the most important numbers to watch, will be Twitter's user growth and ad-engagement numbers. If Twitter manages to report sizeable user growth, that could single-handedly trigger a rally, and every other number will be sidelined. If it can't show user-growth, then it'll be worthwhile to look at what it's doing with the users it does have. Twitter has signed some advertising deals lately, most notably, the one with Ford and CW, and investors will be keen to know how ad-engagement numbers are shaping up.

Any Big Announcements?

The latest rumor doing the rounds is that SoftBank is a potential suitor. We have no way to assess the credibility of the rumor, and we'd say 'don't bet on it'. What we do know is that some news agencies seem to be convinced that Twitter is looking to find a buyer. If no announcement comes forth on the matter, TWTR stock could well fall again. And we all know what will happen if an announcement does find its way into press. That apart, live streaming deals will be of great interest to shareholders, and could positively impact the sentiment around Twitter.

Summing It Up

The stakes are high going into Twitter's Q3 earnings release. The stock has already run up following the latest round of buyout rumors involving SoftBank. If Twitter does deliver strong revenue or user growth, all else will be forgiven. A good quarter here for Twitter could mark the beginning of a material turnaround. However, if Twitter's Q3 results disappoint investors, the stock could plummet, especially now that it has run up strongly following the recent rumors. If you ask an optimist though, that might not be so bad either.

There's a big contingent that's still pounding the table for a buyout, and a sharp correction will only help make Twitter more attractive to potential bidders (assuming there are bidders). But let's not speculate. If you're a conservative investor, you'd rather stay away. If Twitter does turn things around from here, you might still be better off catching the stock on the way up, rather than bottom fishing and potentially catching a falling knife. If you have a risk appetite, you probably already own this stock, in which case, this may not be a great time to add to your tally, yet.

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Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

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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