Has Twitter Stock Peaked?

After a 30% rally from 23rd March, we believe Twitter’s stock (NYSE:TWTR) does not have room to grow based on its valuation. Despite this rally, Twitter’s stock has underperformed the S&P 500 index over the last three months – with the latter gaining 40%. The recovery was first seen after the Fed’s multi-billion dollar stimulus package, which suppressed near-term survival anxiety. One of the primary reasons the stock saw further rise is that the company’s user base is expanding as users can find real-time news stories and discuss current developments on the platform. In Q1 2020, the company saw average monetizable daily active users increase by 24% y-o-y.

The company has seen steady revenue rise over recent years, but its P/S multiple has remained nearly flat. We believe the stock has not much room to grow after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard ‘What Factors Drove 37.1% Change In Twitter Stock Between 2017 And Now?‘ has the underlying numbers.

Some of this rise over the last two years was helped by the 42% rise seen in Twitter’s revenue from 2017 to 2019, while it’s profit increased from -$108 million in 2017 to $1.5 billion in 2019.

Twitter’s P/S multiple remained flat at 7x from 2017 to 2019 and is at the same level currently.

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. Due to the stay-at-home orders, social media platform usage has increased with Twitter seeing average monetizable daily active users increase by 24% y-o-y in Q1 2020. However, revenue growth slowed in Q1 2020 as companies paused their advertising spend due to the uncertainty of coronavirus. We believe Twitter’s Q2 results will see a material hit to the top line from this trend remaining for most of the quarter.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new COVID-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs. historic valuations become important in finding value.

While Twitter’s stock seems to have limited upside potential, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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