I am neutral on Twitter (TWTR) because the rich valuation and Wall Street’s neutral take on the stock offset its strong growth momentum.
Twitter is a microblogging social networking platform that allows users to post micro-messages known as “tweets.” The service was founded by Jack Dorsey, Evan Williams, Noah Glass, and Biz Stone in 2006. (See TWTR stock charts on TipRanks)
Twitter’s Strengths
As of 2019, Twitter had over 330 million users. That was the last number we have, before the company discontinued releasing the metric to the general public. Over two-thirds of companies rely on Twitter for their B2B marketing campaigns. The company has also made several strategic acquisitions to its portfolio, including Periscope, TweetDeck, TapCommerce, Magic Pony, MoPub, TellApart, Lightwell, and Gnip.
The company’s ads remained unimpacted by the global supply chain issues, since over half of its ad revenue is associated with digital goods and services. Twitter also reported that its monetizable daily average users (DAU) grew by 5 million from the second quarter of 2021 to 211 million at the end of the third quarter of 2021. This shows a 13% increase from the same quarter a year ago.
Recent Earnings Results
According to Twitter’s third quarter report of 2021, the company reported revenue of $1.28 billion, showing an increase of 37% from the same quarter of 2020. This includes the ad revenue of $1.14 billion, which saw more than 41% increase year over year. The company reported Apple’s (AAPL) iOS privacy change that required users to opt-in for ad tracking had an impact on the third quarter’s revenue, but that it was modest.
However, the company missed consensus estimates on revenue and earnings because of an $800 million litigation settlement that resulted in a loss of $537 million for the company in the third quarter of 2021. The lawsuit claimed that Twitter intentionally misled investors about user-engagement information.
The company’s average monetizable DAUs reached 211 million in the the third quarter of 2021, showing an increase of 13% from the same quarter of the previous year. In addition, average DAUs in the United States held nearly steady, at 37 million.
For the fourth quarter of 2021, Twitter expects its guidance range for revenue to be between $1.5 billion and $1.6 billion and an operating income between $130 and $180 million.
Valuation Metrics
Twitter’s stock looks a bit richly priced at the moment, as the EV/EBITDA ratio is 26.7x compared to its 5-year average of 22.8x. Furthermore, its Price to forward Normalized Earnings ratio is 59.2x compared to its 5-year average of 53.7x, and its Price to Free Cash Flow ratio is 64.6x compared to its 5-year average of 51.8x.
Wall Street’s Take
From Wall Street analysts, Twitter earns a Hold analyst consensus based on 4 Buy ratings, 14 Hold ratings, and 3 Sell ratings in the past 3 months. Additionally, the average Twitter price target of $69.16 puts the upside potential at 30.12%.
Summary and Conclusions
Twitter operates in the popular and growing social media space and has established itself as a dominant leader in its niche. The company continues to grow on the strength of online advertising revenue.
That said, the stock looks a bit pricey here as the valuation multiples are currently above historical averages, and Wall Street analysts are neutral on the stock. On the other hand, the stock has pulled back pretty sharply in recent months, so the consensus price target does imply significant upside potential over the next year.
However, given analysts’ neutral stance on the stock and the fairly high valuation multiples still attached to the stock, it might be prudent for investors to wait for a further pullback before adding shares.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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