Can Twitter Outperform Expectations During Q4 Results?

Twitter (NYSE:TWTR) is scheduled to report its final quarter results for 2014 on Thursday, February 5th. The company’s stock price fell by around 40% last year, heavily under-performing the broader equity market. The chief factors responsible for this dismal stock performance included failure to match investor expectations on user base and engagement growth, as well as less than anticipated increase in monetization on the platform.

Twitter’s management had guided revenue growth to be around 85% in Q4, which represented deceleration against 124% and 114% levels seen during the prior two quarters. We believe the company should be able to easily beat this guidance due to strong demand for advertising during the holiday quarter. Additionally, active user base growth and engagement levels could well have seen some uptick in sequential terms in the fourth quarter, in our view. Over the long-run, we think Twitter has a solid monetization potential. This forecast stems from various factors, including:  1) a rise in ad load on Twitter to levels comparable to other more-mature social networks; 2) growth in the user base from 284 million monthly active users (MAU) to over 500 million users; 3) a surge in ad pricing with increased engagement and better and more targeted ads; and, finally 4) monetization of the logged out user base.

Our $39 price estimate for Twitter’s stock, represents near 5% premium to the current market price.

See our complete analysis for Twitter

Usage And Engagement Metrics Will Be Closely Tracked

Investors will keenly track Twitter’s active user base growth during the fourth quarter, as it slightly slowed down during the third quarter. The number of average monthly active users (MAUs) increased by 4.8% sequentially in Q3, as compared to 5.8% and 6.3% seen in Q1 and Q2, respectively. In addition, timeline views per MAU (a measure of user engagement) came down by 7% year over year during the third quarter. Twitter enhanced its authentication measures in the APAC region in Q3  and this contributed to the sequential decline in user base growth rate during the quarter.

For the fourth quarter, management had guided timeline views per MAU to be in line with Q4 2013 levels. We expect user base growth to slightly accelerate during Q4, due to seasonality and reduction in authentication measures.

Ad Revenues Could Continue To Grow At A Strong Pace

We expect Twitter’s advertising revenue to grow at a rapid pace during the fourth quarter, driven by the expected rise in advertising demand during the holiday quarter. Increased ad monetization will be fueled by several factors, including growth in ad load level (which is presently very low), a rise in mobile and international ad revenues, and the addition of new ad products.

Twitter’s ad load levels are presently very low (around 1.3%) as compared to around 5% for Facebook. Hence, Twitter currently seems to be trying to sell as many ad slots as possible, leading to heavy growth in the overall number of ad engagements on the platform, along with a corresponding decrease in cost per ad engagement. During the third quarter, Twitter’s cost per ad engagement decreased by 17% and total ad engagements grew by 150% on a year-over-year basis. We expect the same trend to continue during the fourth quarter as well.

Twitter has achieved success on its mobile strategy as this platform now accounts for over 85% of its total advertising revenue. Coupled with rising traction of Twitter’s existing ad products, such as promoted tweets, promoted video ads, website cards and mobile app downloads, we expect mobile ad revenues to rise rapidly in Q4 as well. Addition of new ad products such as promoted video ads combined with better targeting and improved ROI for marketers, could also push average ad pricing to move northwards over the next few quarters (in our view).

Rapidly growing international sales is another long-term growth driver for Twitter’s stock. During the third quarter, international ad sales grew by 176%, at almost twice the rate of U.S. ad revenue growth. Hence, we expect the proportion of international sales in overall sales to rise from the 34% level seen in Q3 2014. Twitter is expanding its sales presence across the globe and is also enhancing the reach of its self-service advertising platform to cover additional markets.  These factors will propel sales growth over the coming quarters.

Monetization Of Passive User Base Represents Another Opportunity

An up-side for Twitter’s outlook also exists from the monetization potential from over 500 million visitors who come to Twitter-owned properties but don’t login, and from hundreds of billions of tweet impressions that are accessed through syndication across the web quarterly. We expect the company to be slow to tap this opportunity, as the initial priority will continue to be on maintaining user experience and on getting a higher proportion of logged out users to sign up on the platform.  We will also be looking for more details around the same strategy from the management during the earnings call.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research