Why Has Twitter Dropped To $27?

by Trefis Team
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After an 18% decline in Twitter (NYSE:TWTR) stock since the beginning of 2020, at the current price of $27 per share, we believe TWTR’s stock has an upside potential, after the coronavirus situation ends, though the stock is likely to remain around the current level for now considering the impact of the ongoing coronavirus crisis. Twitter’s stock has not fallen as low as $27 since the end of 2018 till the start of the coronavirus pandemic. We believe that after the coronavirus crisis, TWTR’s stock is likely to underperform its peers like Snap, but outperform the market which has seen a small recovery in recent weeks. Our dashboard What Factors Drove -7.6% Change In Twitter Stock Between 2018 And Now? provides the key numbers behind our thinking and we explain more below.

 

The stock price rise from $29 at the end of 2018 to $32 at the end of 2019 is justified by the roughly 13.7% increase in Twitter’s revenues from 2018 to 2019. This was accentuated by an increase in Net income margin from 39.6% in 2018 to 42.4% in 2019. As a result, the net income figure rose from $1.2 billion in 2018 to $1.5 billion in 2019. The rise of 18.7% in EPS was partly offset by an increase of 2.2% in shares outstanding.

 

The rise in EPS was partially offset by a fall in TWTR’s P/E multiple, which fell from 18x at the end of 2018 to 16.9x at the end of 2019. This reflects over a 6.1% fall from the end of 2018 till end of 2019. The multiple has dropped to 14x currently which reflects a 22.2% decrease from the end of 2018 to April 2020. This fall in P/E multiple between 2018 and 2019 was not due to a change in the company’s fundamentals, as even though the EPS rose in 2019 the market seemed to expect lower growth from the company. Further, the decline in P/E multiple in 2020 is due to the impact of coronavirus, which we explain below.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. TWTR’s stock is down by about 18% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 15%. Moreover, about 55% of TWTR’s total revenue comes from the US region which has been the worst impacted by the outbreak. Lower consumer spending and consumption would lead to lower demand for online advertising services affecting TWTR’s revenues.

We believe Twitter’s Q1 results will confirm the trend in revenues. It is also likely to accompany a lower Q2 as well as FY’20 guidance. If there isn’t clear evidence of the containment of the virus at the time of the earnings announcement, we believe there is a possibility that TWTR’s stock could see a further downside. However, if there are signs of abatement of the crisis by the time Q1 results are announced, the company’s stock could see an upturn. With a 18.5% decline in its stock price since January 31, 2020, TWTR has out-performed Snap (-29%) but has under-performed the S&P 500 (-15%). In the current scenario, we believe Twitter’s stock is likely to remain around its current levels, with a good upside post coronavirus.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture of historic crashes and how the sell-off during early March compares.

 

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