Twitter’s Stock Is Correcting From Its Outrageous Valuation
Twitter’s (NYSE:TWTR) shares fell about 11% following its Q1 2014 earnings announcement. Adjusting for seasonality, the company did very well on the financial front but the results still failed to impress investors. At this point, the market sentiment is revolving around user base growth and engagement levels rather than Twitter’s profitability. In this regard, the company has performed below market’s expectations. We maintained our price estimate of $28 even when Twitter’s stock soared to $74 arguing that the nature of the service implies slow growth in the number of active users due to limited functionality and value. The first quarter of 2014 was a little better than Q4 2013 in terms of active user additions and timeline views, but it appears that the stock is facing the consequences of extraordinary expectations from investors. We are in the process of reviewing our price estimate in light of recent earnings and will have an update ready soon. Our current price estimate for Twitter stands at $28, implying a discount of about 25% to the market price.
See our complete analysis for Twitter
Engagement And Other Non-Financial Metrics Improved Sequentially
Twitter’s stock took a beating after an early uproar when the growth in its user base and timeline views hit a bump in the fourth quarter of 2013. The year-over-year as well as sequential growth dropped significantly and this is something that has weighed on the stock since then. The price fell again yesterday by more than 10% despite a sequential improvement in Twitter’s engagement metrics. Compared to just 1 million monthly active users that the company added in the U.S. in Q4 2013, the first quarter of 2014 saw a gain of 3 million. [1] Similarly, international active user additions went up sequentially from 8 million to 11 million. [1] Even the number of timeline views increased both in the U.S. and international markets following a surprising decline in Q4 2013. However, the figure still stood below that for the third quarter of last year. It appears that Twitter’s business could get back on track provided the company doesn’t blow off the momentum it has gained in recent months. It will need to demonstrate long term sustainability in its growth.
Finances Are Doing Not So Bad
Twitter’s ad revenue per 1000 timeline views jumped 152% internationally and 78% in the U.S. compared to the first quarter of 2013. [1] However, there was a sequential decline as expected due to seasonality. Much of this growth is being driven by the increasing number of ad impressions. Twitter touted some figures around high ad engagement levels which could help it command higher pricing in future. We strongly endorse this statement. We believe that the company’s integration with TV could help it generate sustainable revenue stream. The Twitter Amplify program allows content companies to distribute videos on Twitter’s platform, with a short advertisement embedded. The revenues from this advertisement are shared between Twitter and the content partner. The company has built several such partnerships in the recent quarters and is increasingly becoming a part of the TV viewing experience
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