Twitter (NYSE: TWTR) is a microblogging social network service that allows users to post and interact with each other.
I am bullish on Twitter because it has strong growth momentum, significant competitive advantages, substantial upside potential based on the consensus price target, and a valuation multiple that appears to be reasonable.
Strengths
Launched in July 2006 in San Francisco, Twitter now has more than 25 offices worldwide. It has been described as the “SMS of the Internet” and was one of the ten most-visited websites in 2017. It is available on the web, iOS, Android, and Windows and requires users to register for an account before interacting with posts.
Twitter identifies with a bird logo and uses the word ‘tweet’ for its posts. It relies mostly on open-source software and has been used for various purposes, from simple social networking to online protests and business.
Recent Results
In the third quarter of 2021, Twitter reported revenues totaling $1.28 billion, which showed an increase of 37% from the same period last year. Meanwhile, advertising revenue totaled $1.14 billion, making up 89% of the total amount. About $742 million of the total revenue came from the U.S., while international revenue stood at $542 million. This showed an increase of 45% and 28% year-over-year, respectively.
The company’s net loss for the quarter was $537 million, with a net margin of -42% and a diluted EPS of -$0.67. This showed a decrease from the previous year’s net income of $29 million, with a net margin of 3% and diluted EPS at $0.04.
Monetizable daily active usage (mDAU) was 211 million on average for this quarter, compared to the 187 million for the same period last year and 206 million for the previous quarter. mDAU in the U.S. was about 37 million, with the remaining 174 million being from the rest of the world.
The company expects revenue to fall between $1.5 and $1.6 billion in the coming quarter, growing faster than expected expenses.
Valuation Metrics
Twitter stock looks reasonably valued at current levels. Its forward enterprise-value-to-EBITDA multiple is currently 23.2x, which is above its five-year average of 21.6x.
Furthermore, its forward price-to-normalized-earnings ratio is 50.9x, which is below its five-year average of 54.1x. That said, revenue growth is expected to be 36.7% in 2021 and 21.7% in 2022.
Wall Street’s Take
Turning to Wall Street, Twitter has a Hold consensus rating, based on five Buys, 16 Holds, and two Sells assigned in the past three months. Additionally, the average Twitter price target of $67.57 implies 48.3% upside potential.
Summary and Conclusion
Twitter is a large social media platform that has an extensive user network and significant competitive advantages within its space. Furthermore, growth momentum is very strong for the foreseeable future.
That said, the stock is not cheap here, nor is it expensive. As a result, analysts on Wall Street appear to be correct in their assessment of the stock being rated a Hold. On the other hand, the consensus price target puts massive upside potential on the stock over the next year.
Therefore, investors might want to consider Twitter. However, they should keep the risks associated with the lofty valuation multiples in mind.
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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