Quick Thoughts: TWTR – Let the Haters Hate, I’m Still a Buyer … For Now
– Given the dizzying pace of TWTR’s December run from $39 to more than $74, this pull back is understandable. Still, TWTR is poised to soundly beat consensus for quarters to come.
– 4Q consensus expects a 32% seasonal QoQ sales bump, same as in ‘12, despite the launch of major product initiatives likely to juice user growth, engagement, ad density and ad pricing.
– 2013 sales growth has accelerated to more than 120%, yet estimates portend an abrupt deceleration for 2014 and little EPS leverage. A 4Q13 beat will force sharp upward revisions.
– If TWTR can hit my forecasts through 2017, the current share price is justifiable, but just so. Nonetheless, without any obvious negative catalysts, I’m more inclined to buy than sell.
Twitter has been a roller-coaster ride, with the recent one month run from less than $40 before Thanksgiving to nearly $75 on Boxing Day, forcing many a brokerage analyst to put off assembling that “Barbie’s Dreamhouse” for a day or two and write a downgrade. Now here we sit looking at New Year’s Eve, and a $60 share price, wondering what to do now.
First off, a warning to those of whom didn’t pull the trigger on that $74 sell last Thursday. I think Twitter is very, very likely to beat consensus expectations for 4Q13 when they report in a month or so. Collectively, the sell side is looking for revenues of $217M, less than a 30% seasonal bounce vs. the $168M posted in 3Q13, and up 85% YoY. In contrast, the seasonal bounce a year ago was a whopping 48%, and the YoY growth during 3Q13 had accelerated to 102%. Basically, consensus is looking for a fairly substantial deceleration from the torrid pace delivered over the past year.
Ordinarily, predicting a deceleration for a company that is doubling its sales YoY is a pretty fair bet, but this time management has a deck full of aces up its sleeves. I noted at the time of the initial S-1 that Twitter hadn’t seemed to be trying very hard to monetize its service, with past measures of ad density decidedly lackluster, particularly in comparison with Facebook which had just blown out its own earnings by demonstrating just how much more advertising it could jam down its subscribers’ throats. The surprising 3Q13 results subsequently announced in Twitter’s amended S-1 allowed a glimpse into the potential for future monetization, with ad revenues accelerating to 123% YoY growth driven by somewhat more aggressive placement of ads in timelines.
There is plenty of reason to believe that Twitter has continued to ramp up its ad placements during 4Q13, traditionally the strongest quarter of the advertising year. Moreover, Twitter has begun to roll out a raft of new product initiatives, all with the potential to juice revenues further beginning now and growing in 2014. Twitter launched its Amplify program, which signed media partners to cross-promote advertising products across traditional media and Twitter’s timelines. The list of partnerships is impressive – NBC/Universal, CBS, Fox, ESPN/Disney, the NFL, the NBA, Conde Nast, blah, blah, blah – and ads generated from the initiative are flooding user timelines. Twitter also changed its display format in October, showing image and video previews directly in user timelines, thus enticing more ad engagement and justifying higher prices. Twitter also launched a program to use its subscriber profile data to target ads to users on other platforms – a product concept that has been highly successful for Google and Facebook and one that is particularly promising for Twitter given the unusual insight that the service has to its user’s real interests. Meanwhile, the scuttlebutt on the street seems to suggest that social/mobile advertising has gained the trust of advertisers, taking a bigger piece of campaign budgets. Twitter’s ongoing partnership with Nielsen for measuring the effectiveness of hybrid campaigns is undoubtedly a boon, as is those close relationships with the traditional media companies that still receive the lion’s share of ad dollars.
With all of this happening, it would seem that Twitter is set to add upon the success that it demonstrated in 3Q13. Not so fast – at least, according to the sell side and its pesky consensus. Despite all of the potential catalysts and the hard evidence of accelerating advertising sales, the street expects the success to come a cropper, not just in 4Q13 but throughout 2014 as well. Estimates forecast YoY growth to drop from the 102% delivered in 3Q down to 85% for 4Q. Imagine how bad it might have been, if Twitter hadn’t had all of those new monetization initiatives launching in the quarter (N.B. The previous sentence should be interpreted as sarcastic.) For 2014, consensus is expecting $1.128B in sales, up less than 70% vs. what I think are reasonable estimates for 2013. A 4Q13 upside surprise will almost certainly beget substantial upward revisions.
Given this backdrop, valuation may be a fool’s errand. Growth stocks that beat numbers on encouraging news flow tend to outperform. Still, the current $60 price isn’t too difficult to justify, assuming that you agree on the longer term revenue and profit potential of the company. I believe that Twitter can grow its sales at a better than 60% average annual pace through 2017, with 89% top-line growth cooling to 39% four years out. Even at that pace, $2.9B in 2017 revenues would see it still far behind where Facebook is today. I have written about the drivers for Twitter’s future revenues (see “Twitter: Out of the Nest, Into the Sky” and “Twitter: There’s Gold in Them Thar Tweets”)and I won’t repeat it all here. Let it suffice to say I’m fairly confident that Twitter can get there. Apply a present day Twitter or LinkedIn multiple to those revenues (roughly 20x trailing sales) and you get a $55-60B market cap, out 4 years in the future. Discount that back at 10% and you get roughly today’s share price. Granted, that’s not all that much upside given the risks involved, but if Twitter keeps beating numbers, it won’t matter for a while.
Let the haters keep hating. I’m a buyer of Twitter, not a seller, even at this price. Now if it goes back up to $74…
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