Why We Lowered Our Twitter Price Estimate
Twitter (NYSE:TWTR) reported weak Q4 and full year 2016 results last month, with adjusted earnings per share beating market expectations but reported revenue falling far short of analyst consensus estimates. The company’s disappointing sales growth was attributed to lackluster user growth last year. Owing to weak results and lackluster guidance, Twitter’s stock tanked following the earnings announcement on February 10. The company’s stock has lost about 12% of its value in the last year.
In the fourth quarter, Twitter’s average monthly active users (MAUs) grew 4% y-o-y to 319 million, but the company was encouraged by growth in daily active users (DAUs). In Q4 2016, Twitter’s DAUs increased 11%, compared to 7% in Q3 2016, 5% in Q2 2016 and 3% in Q1 2016. Interestingly, the company did not report its DAUs in absolute numbers, instead focusing on the growth rate. 
Our estimates for the company’s valuation had assumed a moderate turnaround in its user additions as well as user engagement levels at the end of 2016 and in early 2017. With the results falling short of our expectations, we have slightly lowered our forecasts for Twitter’s user engagement levels in the 2017-2021 period, resulting in lower future cash flows and a subsequently lower valuation for the company. Our new price estimate for the company of around $16.50 is about 25% lower than our previous price estimate, and is slightly ahead of the current market price. The tables below illustrate the changes made to our model:
Twitter’s struggle to grow its active user base has been the primary investor concern for the past two years, and that is unlikely to change in the near term. However, with the company redirecting its focus from user expansion to profit generation, the key metrics in focus are likely to become user engagement and average revenue per user going forward.
Another trend we are watching closely is growth in video. Video consumption has been growing tremendously over the past few quarters on Periscope as well as the Twitter platform with the launch of auto-play videos. It will be interesting to see if this also translates into higher advertising revenue growth going forward.
Have more questions about Twitter? Please refer to our complete analysis for Twitter
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