Here’s Why We Think Twitter Will Be Fairly Valued At $48

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TWTR: Twitter logo
TWTR
Twitter

Twitter’s (NYSE:TWTR) stock has nosedived by more than 25% over the last one month on the earnings disappointment. Specifically, lower-than-expected monetization on some of the newer direct response ad products (ads that prompt users to take specific action such as downloading an app  or visiting a website) led to this investor reaction. Nevertheless, we think this market reaction could be overblown, and we continue to remain bullish on the company’s long-term growth prospects.

We think the market could be undervaluing Twitter’s stock presently, as the challenges pertaining to newer ad products could turn out to be short-lived. While the direct response ad products have elicited less-than-anticipated demand from marketers, we believe the company could improve the quality and measurement of ads over the long run. The recent acquisition of marketing technology company ‘TellApart’, coupled with the partnership with Google’s DoubleClick platform, will help in this direction, in our view. As advertising evolves and becomes more mature on Twitter, we believe this will also spur demand over the coming quarters. In this note, we highlight the key rationale for our $48.37 price estimate for Twitter’s stock.

Over a longer horizon, we believe there are several drivers in Twitter’s business model that could propel its revenues in the coming future. An increase in user base, which is estimated to double over our forecast horizon, as well as significant expansion in ad load levels could lead to a sharp increase in advertising revenues on Twitter. In addition, the monetization of a passive user base, that comprises of hundreds of millions of users that visit Twitter but don’t login, as well as hundreds of billions of tweet impressions that are accessed through syndication quarterly, could also propel revenues over the coming years. At the same time, we also expect the company’s margins to expand in the coming years driven by operating leverage and efficiency improvements.

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See our complete analysis for Twitter

Twitter’s Advertising Revenues Could Cross $9 Billion In The Long Run

Notwithstanding the recent challenges pertaining to newer ad products, we forecast Twitter’s advertising top-line to surge from $1.2 billion in 2014 to more than $9.5 billion by 2021. The key drivers for these top-line estimates include growth in user base, expansion in ad load levels and international revenues, as well as the delivery of better and more targeted ads.

  • We estimate Twitter’s average monthly active user (MAU) base to surge from 274.5 million in 2014 to over 550 million by 2021, driven primarily by increased adoption in international markets.
  • Expansion in ad load levels represents a key growth driver, as Twitter’s ad load levels are very low (at around 1.5%) as compared to 5% levels for other mature social networks (such as Facebook). We expect the total number of ad engagements to continue to rise sharply over our forecast horizon until its ad load levels become optimal.
  • Because Twitter is rapidly expanding both its sales network and the reach of its self-service advertising platform across international markets, we forecast international expansion to propel the company’s revenues in the coming years.
  • Additionally, the roll-out of more advanced ads (featuring videos), along with improvement in ad targetability, will drive click-through rates and improve ROI for marketers in the coming future; this will lead to an increase in ad pricing on Twitter, in our view.
  • Along with in-Twitter ads, the company has also begun to monetize its passive user base, which includes hundreds of billions of tweet impressions that are accessed through syndication. With the company recently signing deals with Flipboard and Yahoo Japan, we expect it to more aggressively syndicate ads across non-Twitter owned web properties in the future.
  • In addition to advertising revenues, we also forecast Twitter’s data licensing revenues to grow over the coming years.  The recent partnership with Google giving the latter access to real-time tweets will strengthen this revenue stream.

Significant Scope For Margin Expansion At Twitter

In addition to our bullish top-line estimates, we forecast Twitter’s bottom-line to surge over the coming years. More specifically, we estimate Twitter’s EBITDA margin to rise from 21.4% in 2014 to around 50% by 2022 fueled by the following factors:

  • We expect operating leverage owing to faster top-line growth to be the key factor driving margin expansion in the coming years.
  • Alongside, we expect R&D and sales & marketing expenses as a percentage of revenue to trend down over the coming years, with more maturity in the business model as well as due to the uniqueness of Twitter’s platform.
  • As a benchmark, Facebook’s EBITDA margin was recorded at 66% in 2014; hence, our margin estimates could also turn out to be conservative over the long run.

Our 48.37 price estimate for Twitter’s stock, represents near-30% upside to the current market price.

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