Quick Thoughts: TWTR – A Week Later
– TWTR has settled into the low-mid $40’s, yielding a fully diluted market cap of roughly $30B – coincidently the same floor valuation suggested by discounting a future multiple of sales.
– 4Q13 consensus expects a 32% QoQ seasonal sales bump in 4Q, off from last year’s 32% holiday increase despite the sharp acceleration in ad sales to a torrid 123% YoY growth in 3Q13.
– New initiatives – timeline media previews, Amplify partnerships, custom timelines, etc. – should be a further boost to 4Q13 ad revenues, suggesting even greater seasonality than last year.
– Given strong momentum and the new initiatives, 2014 consensus sales are too conservative, as are projections for a (-$0.04) EPS. Upside surprises should drive outperformance.
In their first week of trading, Twitter shares have been whipsawed a bit, opening 70% above the $26 IPO price, popping above $50 on the first day, dropping below $40 on Monday, and rallying back to nearly $45 today. While none of the syndicate brokers have been able to comment, 12 available analyst target prices range from $20 to $54, with a mix of strong buys, neutrals and strong sells in the mix. Given this level of disagreement, it is difficult to call the mean estimates of such a group a consensus.
Ahead of the IPO, I was very vocal with my assessment that the company was conservatively worth at least $30B. So with the current $44.50 share price and 705 million fully diluted shares (including all of the generous employee grants expected to be paid out), Twitter is officially above that initial valuation. At the risk of seeming like an equivocator, I note that my original “target” was intended as a bit of a floor, to show that even with extremely conservative assumptions – e.g. no benefit from the MoPub acquisition, continued sharp ad pricing declines, and a punishing 30% discount rate – you could still get to a valuation wildly above the offering price. Now that we are here, I’d argue that it’s realistic to consider a less conservative scenario. For example, employing a still sky high 25% discount rate to our model without any adjustment to sales assumptions or future multiples takes the NPV to $37B or a $52 share price.
Moreover, the bi-polar consensus has set an easy 4Q13 bogey for the company. Ad driven businesses are typically seasonal. In last year’s 4Q, Google’s ad revenue was up 12% sequentially, Facebook’s sales were up 25%, and Twitter’s were up 36%. This year, the analysts collectively estimate 4Q13 sales at $224M, up 33% QoQ, and a deceleration to less than 100% YoY growth despite 105% growth in each of the two prior quarters. At first blush, this seems reasonable – shouldn’t we expect sales growth to tail off from the torrid triple digit pace of the past year?
Actually, no. First thing – advertising sales, now 91% of total sales, accelerated to 123% YoY growth in 3Q13 on a concerted effort to drive greater ad density. That acceleration should continue to play out in this quarter as well. Second – over the past few months, Twitter has signed on a pantheon of media partners, including Comcast/NBC-Universal, CBS, Fox, ESPN/Disney, Viacom, the NFL, the NBA, CondeNast and several others, as part of its Amplify program. These partners agree to promote Twitter as a part of their programming and to make exclusive video content – e.g. highlights, previews, etc. – available for sponsored tweets. While the resulting revenue is shared with the media partners, pricing for video advertising is many times the price of banner ads, making it a win/win for both sides of the partnerships. Moreover, the cross-promotions are expected to drive new user growth and increased engagement, giving Twitter more ad inventory to sell. These programs are kicking in for 4Q13. Third – at the start of the quarter, Twitter enhanced its timeline to include media previews, for example: thumbnails of images or still shots from videos. These previews should make it more likely for users to engage with advertisements, thus driving higher prices and a better click rate. Finally, Twitter just launched an update to its TweetDeck app, allowing users to easily create and swap between customized timelines. This should also increase engagement and raise the profile of Twitter’s sponsored trend advertising product.
It is no coincidence that all of these revenue enhancing innovations have effectively launched in the first quarter after the IPO. Any one of them would be worth a modest revenue kick on top of the already well-established momentum. Getting all four of them at once is a new gear entirely. I look for 4Q13 sales to be well above the $224M consensus, possibly topping $250M with advertising growth accelerating from the 123% established last quarter to better than 135%. The prospects should raise enthusiasm for the stock once the syndicate brokers are back in the game, and even if the beat is not as epic as I believe it can be, Twitter should start 2014 with a tailwind behind it.
With that tailwind, the current estimates for next year also look too conservative. Consensus top line slows from better than doubling in 2013 to 75% growth in 2014, but considering that there was little deceleration over the course of this year and that 4Q13 could show a bit of an acceleration, the quarter to quarter pattern would have to turn down quite abruptly to accommodate the collective perspective. Given those 4 new initiatives launched in 4Q, the prospect that the recently acquired and reputedly fast growing MoPub could meaningfully contribute before the end of 2014, and the potential for further revenue enhancing innovation, the consensus numbers seem overly gloomy. True too, on the cost side, where consensus expects Twitter to continue non-GAAP losses despite gaining leverage from rapid sales growth. I suspect that the company can deliver profits in 2014, another potential catalyst for the stock.
Given all of this, I am a buyer of Twitter, even at this price. If I worked for a broker dealer (I don’t) and officially covered the stock (again, I don’t), I think I would be raising my price target to $55 today.
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