Twitter Mid Year Review: Stock Down 18% YTD On User Addition Struggles, Weak Top Line Guidance

45.08
Trefis
TWTR: Twitter logo
TWTR
Twitter

Twitter‘s (NYSE:TWTR) stock is down close to 30% in the last year and about 18% year-to-date (YTD) following mixed first and second quarter results and disappointing third quarter guidance. In the first six months, the company’s top line grew 27.5% year-over-year (y-o-y) to $1.2 billion and its net loss declined by 37% to $187 million owing to double-digit growth in both advertising and data licensing revenue and effective expense management. However, lackluster growth in active users and subdued advertiser demand led the company to forecast disappointing guidance for the third quarter, which wasn’t received well by investors.

twtr-1twtr-3

User Addition Struggles

Twitter’s average monthly active users (MAUs) grew just 3.6% y-o-y and 2.6% since the start of the year to 313 million at the end of June 2016. The company’s struggle to grow its active user base has been the primary investor concern for the past several quarters, and that is unlikely to change in the near term. Twitter recently started focusing on video to attract new users through its different offerings such as Periscope, Vine and live-streaming. twtr-5

Live Streaming Deals

In a significant development this year, the company signed deals with several companies to live-stream events on its platform, including 120 Sports, Bloomberg TV and the Big Four major sports leagues in the U.S.- Major League Baseball (MLB), the National Hockey League (NHL), the National Basketball Association (NBA) and the National Football League (NFL). Considering the popularity of live sporting events in the U.S., live streaming games presents a huge opportunity for Twitter to improve its largely stagnant user base and attract more advertisers.

Free Cash Flow Improvement

On the bright side, Twitter’s free cash flow in the first six months of the year improved over 22x y-o-y owing to higher cash flow from operating activities and lower capital expenditures. The company’s adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) also grew 121% to about $103 million in the first half of 2016. Adjusted EBITDA is Twitter’s EBITDA adjusted for stock-based compensation expenses (59% of adjustments), depreciation and amortization expense (34% of adjustments), interest and other expenses, provision (benefit) for income taxes and restructuring charges. twtr-2

Capital Expenditure Guidance

Twitter has been quite conservative with respect to capital expenditures this year so far and its full year 2016 guidance suggests that such investments are likely to remain near last year’s levels of $350 million. This should help the company improve its free cash flow further in the near term.
twtr-4In our model for Twitter, we estimate the company’s capital expenditures to stabilize to around 11% of revenues by the end of our forecast period. However, if this increases to 13%, there could be a potential downside of 6% to Twitter’s enterprise value. On the other hand, if the company’s capital expenditures decrease to 8% of revenues by the end of our forecast period, there could be a potential upside of 7% to our estimate for Twitter.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

Relevant Articles
  1. Twitter Stock Gained 9% In One Week, Where Is It Headed?
  2. Twitter Stock Posted Weak Results In Q2, What To Expect Next?
  3. Company Of The Day: Twitter
  4. Company Of The Day: Twitter
  5. Is Twitter’s Stock Undervalued At The Current Price?
  6. What’s Next For Twitter’s Stock?

More Trefis Research