Is Twitter’s Stock Fairly Priced?

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Trefis
TWTR: Twitter logo
TWTR
Twitter

Our valuation methodology suggests that Twitter (NYSE:TWTR) stock is worth $26.50, which is around 10% lower than the current market price. Our price estimate is based on a P/E multiple of around 32.5, slightly lower than the levels at which the stock has traded in recent years. Twitter’s profitability has improved in recent years with Q4 2017 being the first quarter ever with positive net income  (GAAP). On a non-GAAP basis, Twitter’s net income has consistently improved from $277 million in 2015 to $510 million in 2017.

For 2018, we expect Twitter’s revenues to pick up after a slowdown in 2017, while net income margin is expected to continue to improve. We have summarized our expectations on our interactive dashboard platform. If you disagree with our forecasts, you can change the key drivers including user growth, revenue per user, and net income margins for Twitter to gauge how changes will impact its valuation.

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ARPU to Bounce Back

Twitter’s total user base has consistently increased from under 300 million in 2014 to 328 million in 2017. We expect the modest increase in monthly active users for Twitter to continue through 2018 as well. On the other hand, Twitter’s average revenue per user (ARPU) fell from over $8 in 2016 to under $7.50 in 2017. The primary reason for the drop in ARPU was the 52% decrease in average cost per ad engagement through the year despite a 96% annual increase in the total number of ad engagements through the year. This was attributable to much of the ad content switching to video-based ads, which typically have lower cost per ad engagement compared to other formats.

However, Twitter’s management believes that higher engagement (and resulting improving click-through rates) will help the company monetize video ads better in the long run. Keeping this in mind, we forecast Twitter’s ARPU to increase gradually in the near-term and to accelerate in the long run. Our forecast for 2018 ARPU for Twitter stands at $7.80. As a result, we forecast net revenues to be around $2.6 billion for the year.

 

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