Twitter’s (NYSE:TWTR) upcoming Q4 2013 earnings release is going to be interesting for a couple of reasons. First, it is the first earnings announcement since the company’s successful IPO and we are eager to get more insight into the dynamics of the business and how things have changed since the offering. Second, the current market price is significantly above the IPO price and it will be interesting to see whether the fourth quarter results justify such premium. Our price estimate for the company stands at $26, which is a discount of about 55% to the market. Unlike the market price, our estimate is based on a diluted share count of approximately 666 million for Twitter, which includes restricted stock units and outstanding stock options.
We expect the company to report notable growth in its global user base, as well as growing monetization as advertisers continue to increase their budget allocation for Twitter. However, we have already priced in such growth expectations and expect full year 2013 revenues to amount to more than $630 million with EBITDA reaching $45-$50 million.
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Growth In User Base
Twitter’s average monthly active users stood at 160 million in 2012. We expect fourth quarter results to push this figure for the full year 2013 to 226 million. Most of this growth will have been driven by: 1) growing smartphone penetration; 2) Twitter’s value proposition to users and marketers; and, 3) its integration with third-party sites. All of this has resulted in wide distribution and visibility.
Twitter allows its users to tweet messages which are limited to 140 characters. As a result, the messages tend to be concise and relevant, thus making content sharing more meaningful. As tweets are primarily public, users can follow celebrities, media outlets, political leaders, think tanks, companies, brands and other content of their choice. This helps them stay abreast with latest news and events, and benefit from the ideas of others. We believe this trend will continue to catch on globally, and bring more users to Twitter’s platform.
Monetization Will Improve
We believe Twitter’s monetization (ad revenue per 1,000 timeline views) improved in Q4 2013 as the company continues to benefit from the general shift of advertising dollars from traditional media to the Internet. Also important is its ability to effectively target advertisements to the right audience. More than 90% of 100 Ad Age advertisers marketed themselves on Twitter in 2013. These advertisers are getting an attractive return on investment as they can leverage Twitter’s data to improve the ad engagement. The benefit is not just limited to the initial targeting. Due to the ‘retweet’ feature and the viral nature of the platform, these ads or promoted tweets tend to get distributed to a much larger audience for no additional cost.
Twitter is benefiting from new ad products and there have been some positive positive reports around the adoption of the company’s ad platform among advertising professionals. According to a survey conducted by RBC Capital Markets, the ROI (return on investment) for advertisers on Twitter seems to have increased over in the last few months and 59% of the survey respondents plan to increase their ad spend on the platform over the course of next year. 
Our price estimate for Twitter stands at $26, implying a discount of about 55% to the market price.Notes:
- Twitter: RBC Ups Target to $60, Topeka Toots Own Horn, As Stock Surge Continues, Barron’s, Dec 13 2013 [↩]