How Much Can Improvement In Operating Margins Impact Twitter’s Valuation?
Twitter (NASDAQ: TWTR) has been posting losses since its inception, while its larger peers such as Google (NASDAQ:GOOG, GOOGL) and Facebook (NASDAQ:FB) have been posting robust profit margins and cash flows in recent years. Twitter’s inability to turn profitable has had an impact on its valuation, which has declined from its peak of over $50 billion to around $18 billion presently (though subscriber growth issues have also played a big role in that). However, if the company is able to rein in its costs and boost profitability, there could be some substantial valuation upside. We have created an interactive model that details how a change in operating margins can impact Twitter’s valuation. You can modify assumptions such as projected revenues and operating margins to see how the dynamics of margins and valuation change. The image below shows one of the key steps in identifying Twitter’s stock sensitivity to change in its operating profit margin. We detail how a change in margins impacts cash flows, which in turn impacts Twitter’s discounted cash flows and subsequently its stock price.
Our price estimate for Twitter stands at $23, which is slightly below the market price.
We estimate that an expansion of just 1% in Twitter’s operating margin could lead to a nearly 3% upside to its valuation. Our sensitivity analysis assumes that margin gains will persist throughout our forecast period, so faster-than-expected margin expansion could lead to some significant upside for the company. Using our dashboard, our margin forecasts can be modified to see the consequent impact on Twitter’s valuation.
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