Here Are The Key Triggers For Twitter’s Stock

Twitter‘s (NYSE:TWTR) top-line is forecast to rise from $1.4 billion in 2014 to more than $9 billion by 2021, in our $49.37 price estimate for the company’s stock. Notwithstanding these estimates, we believe there are certain plausible scenarios that could move the company’s stock considerably over the coming years, assuming the market prices in these developments correctly. Specifically, we think the possibility of slower-than-expected user base growth and an increase in ad load levels (comparable to Facebook) are certain probable events that could impact stock price changes for better or worse.

See our complete analysis for Twitter

Monthly Active User (MAU) Base Expands To Only 450 Million (-10%)

We believe a rise in the monthly active user base is a key trigger for Twitter’s stock, considering its frequent comparison with other popular social networks such as Facebook, and owing to concerns related to slowing user growth on the platform.

We estimate Twitter’s overall monthly active users (MAU) will surge to more than 550 million by the end of our forecast horizon in our $49.37 price estimate. We believe this will mainly be driven by growth in international markets, as we expect Twitter to add about 30 million international users annually over our forecast period. At the end of 2014, the ratio of Facebook’s monthly active users to that of Twitter stood at 3.3:1 in the U.S.. In contrast, the same ratio for international markets was seen at 5.3:1. This implies Twitter is under-penetrated within international markets and has significant scope for expansion. The global growth in smart phone sales coupled with increasing Internet penetration in emerging markets will propel Twitter’s user base growth over the coming years.

Under a scenario, wherein Twitter’s overall MAU rises to only 450 million by the end of our forecast period, then it would take our valuation 10% lower to $44.20.This scenario is plausible due to factors including:  1) increased competition from other social networks and mobile applications such as Facebook, Instagram, WhatsApp, WeChat, etc.; and, 2) the unique value proposition offered by Twitter may limit its popularity with certain demographics of users.

Ad Load Levels Rise To 4% By 2020 (+30%)

An increase in ad load is a key driver for Twitter’s stock, considering its present ad load levels (around 1.5%) are far below the 5% levels for more mature social networks (such as Facebook). In our valuation model, we expect ad load level to rise to about 3% by 2020, assuming average ad pricing grows by about 6% annually over our forecast period. This is based on conservative estimates of demand growth on the platform, owing to heightened competition from other social networks for both marketing dollars as well as leisure time of consumers.

Twitter’s stock is highly sensitive to ad load levels — in the event, ad load levels rise to 4% by 2020 (assuming 6% CAGR growth in ad pricing), then it will take our price estimate 30% higher to $64.30. We believe there is some likelihood of this scenario taking place, if Twitter is able to aggressively raise the demand for advertising on Twitter. The company is rapidly expanding its sales presence and self-service advertising platform across international markets.  We believe its success in gaining traction in these markets could lift ad loads on the platform. Additionally, the continued roll out of better and more targeted ads having higher ROI could positively impact ad loads on the platform.

Our $49.3 price estimate for Twitter’s stock, is broadly in line with the current market price.

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