Here’s Why We Changed Our Price Estimate For Twitter To $23

We recently revised our price estimate for Twitter‘s (NYSE:TWTR) stock from $16 to $23, a change of around 40%. The company is focusing on acquiring more users for its platform and rolling out new video content and formats. We expect this to lead to improvement in user growth and average revenue per user (ARPU) across both the U.S. and International segments. Additionally, more targeted ads that derive higher pricing, as well as the monetization opportunity from the passive user base, should drive additional value for the company. Finally, a decrease in capital expenditures, sales & marketing and research and development expenses (as a percentage of revenue) in the long run should also lead to strong growth in free cash flows.

Our $23 price estimate for Twitter’s stock, represents a slight downside to the current market price.

See our complete analysis for Twitter

Twitter’s Top Line Could Grow To $3.75 Billion By 2024

We estimate Twitter’s revenue to increase from $2.35 billion (estimated) in 2017 at a CAGR of 7% over our forecast horizon to reach over $3.7 billion ($755 million increase compared to our previous estimate) by 2024. The key factors behind this top line estimate are below:

• We forecast Twitter’s monthly active user base to rise from 329 million (average) in 2017 to 382 million by 2024, driven primarily by growth across international markets. We estimate Twitter’s international users to increase by around 7 million annually over our forecast period.
• Additionally, we forecast the company’s ARPU to improve across both the U.S. and International markets as the company improves its direct ad format and rolls out more video content and ads. Growth in the U.S will be a key driver for Twitter’s stock as it is rapidly expanding its sales network as well as the reach of its self-serve advertising platform across markets. Consequently, we forecast the company’s U.S. ARPU to rise from an estimated $20 in 2017 to over $28 over the coming years. We also expect its ARPU in international markets to improve as Twitter’s platform matures and the company launches improved content and new ad formats, as mentioned above.
• Growth in video ad impressions is driving improvement in total ad engagements, click-through rates, while better targeting and ad relevance is reducing the Average Cost Per Engagement (decreased 54% year-over-year in Q3 2017).

Costs To Decline In The Long Run

We expect Twitter’s costs as a percentage of revenue to decline as the company reins in its cost base and grows revenues. This will be driven by the following factors:

• While R&D expenses are likely rise in absolute terms over coming years, we believe these expenses will trend down as a percentage of revenues, due to the company’s expected revenue growth. While Twitter will continue to invest in areas that bolster user engagement and ad relevance, we don’t expect these expenditures to keep pace with the forecast revenue growth.
• The same factor will likely lead operating expenses such as sales and marketing expenses to fall as a percentage of revenue over the coming years as well.
• We forecast capital expenditures as a percentage of revenue to decline over our forecast horizon, though this metric will likely rise substantially in 2017 owing to investments in data center infrastructure and real estate. Overall, however, Twitter’s business model is not capital intensive and as a result we don’t expect significant growth in capex.

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