The Key Downside Scenarios For Twitter’s Stock
Twitter‘s (NYSE:TWTR) stock has lost favor among investors this year, with its stock plunging by around 30% year-to-date. Slow growth in its user base, coupled with a soft future outlook, have been mainly been responsible for the bleak performance. Additionally, a spate of management changes have also weighed on the stock. Though our $34 price estimate for the company’s stock represents a premium of over 30% to the current market price, we believe there are certain plausible scenarios that could lead to wide swings in Twitter’s valuation over the coming years. More specifically, the possibility of a less-than-expected increase in the user base and advertising revenues could adversely impact the stock over the next several years.
See our complete analysis for Twitter
Monthly Active User Base Rises To Only 400 Million By 2022 (-20% Impact)
Growth in its user base will be a key factor that will influence Twitter’s stock in the coming years, given that the company has under-performed on this metric over the past few quarters. Its core users (excluding SMS fast followers) increased by 19 million during the nine months ended September 2015 to 307 million. In comparison, other social networks such as Facebook, Snapchat and LinkedIn saw much faster growth during the same period.
In our valuation model, we forecast the active user base growth to accelerate on Twitter in the coming years, on the back of new product innovations being rolled out. As a result, we forecast Twitter’s overall monthly active user base to increase to over 500 million by 2022, as we believe the company will largely be able to reverse the declines in its rate of growth. We note that recent product innovations such as Moments have been well received in the social media community and could fuel some growth in the coming quarters.
However, under a more bearish scenario, wherein Twitter’s global MAU rises to only 400 million by the end of our forecast horizon, our price estimate would be around 20% lower at $28. This scenario is plausible due to the following factors: 1) the rapid rise in competition from other social networks and mobile apps could lead to reduced engagement level on Twitter; 2) Twitter’s new product innovations could also cause some disruption with its power users; and, 3) Twitter’s efforts to make the social network simpler for newer users could be less successful than expected.
Twitter’s Advertising Business Increases To Only $6 Billion By 2022 (-25%)
In our current price estimate, we forecast Twitter’s ad revenues to rise at around a 26% CAGR over our forecast period to reach $8 billion by 2022. This is based on the assumption that Twitter’s user growth levels will accelerate, and the company will be able to raise its ad load levels significantly on the micro-blogging platform. We also expect Twitter to see stable growth in engagement levels over our review period in these top-line estimates.
However, a more pessimistic scenario, wherein Twitter’s ad revenues rise at a 21% CAGR to reach $6 billion by 2022, would generate an estimated price of $26.50, which represents a 25% decrease from our current price estimate of around $34. This bearish scenario could take place under the following conditions: 1) if Twitter’s ad offerings fail to gain traction with marketers, owing to better ROI levels on other social networks; 2) if Twitter’s engagement levels fall in the coming years, owing to less usage by power users; and, 3) if Twitter’s efforts to attract the mass audience fail to yield results.
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