TWTR Stock: Time to Bail on Twitter Inc?

Another Big Drop in Twitter StockAnother Big Drop in Twitter Stock

It’s not really new to investors that Twitter Inc (NYSE:TWTR) stock is in the doldrums.  But when it drops another 16.3% in one trading session, you might start to wonder, is there any hope left in Twitter stock?

Well, first there is some sort of a pattern here. In recent quarters, whenever the company reported earnings, Twitter stock got killed. And it’s not like the company was missing earnings estimates or anything.

In fact, Twitter’s performance has been more than solid. In 2015, the company beat Wall Street’s earnings-per-share (EPS) estimates in all four quarters. Yet Twitter stock traded lower on the day after those earnings every single time. (Source: “Analyst Estimates,” Twitter Inc, last accessed April 28, 2016.)

The sad reality is that no one remembers second-place finishers. In the social media industry, Facebook Inc (NASDAQ:FB) is the undisputed king. With 1.65 billion monthly active users (MAUs), Facebook’s userbase is more than five times that of Twitter’s. (Source: “Facebook Reports First Quarter 2016 Results and Announces proposal for New Class of Stock,” Facebook Inc, April 27, 2016.)

When the market leader released its earnings report on Wednesday, everybody cheered. On the next morning, Facebook stock surged more than 10%. Twitter stock, on the other hand, did not have that luxury.

Twitter reported first-quarter earnings after the closing bell on Tuesday, April 26. At the top line, the company grew its quarterly revenue 36% year-over-year to $595.0 million, but missed Wall Street’s revenue expectation of $607.8 million. (Source: “Twitter Q1 2016 Shareholder Letter,” Twitter Inc, April 26, 2016.)

The bottom line is where Twitter really shone. On average, analysts were expecting $0.10 in adjusted earnings per share. How much money did Twitter actually make? It made $0.15 per share—50% higher than what Wall Street was expecting.

MAUs, a key metric for social media companies, also turned out to be better than expected. In the reporting period, Twitter’s average MAUs came in at 310 million, up three percent year-over-year and higher than Wall Street’s expectation of 308 million.

So overall, things are pretty decent. But that did not prevent Twitter stock from tumbling another 16.3% on the following day. In the past 12 months, TWTR stock has plunged a staggering 64.2%.

There is still hope for the company, though. In particular, Twitter’s monetization efforts have started working.

Advertising has been the main driver behind Twitter’s revenue growth. In the reporting quarter, the company’s ad engagements skyrocketed 208% year-over-year. And that’s mostly due to one thing—video.

Twitter added native video capabilities to its social media platform last year. Moreover, it also allowed users to live-stream “Periscope,” a live broadcasting platform, directly from Twitter. What this means is more video ads on Twitter.

In the reporting quarter, Twitter’s revenue from video ads nearly tripled year-over-year. Note that video ads are more lucrative compared to text and image ads and they also fit nicely with Twitter’s native advertising strategy.

The Bottom Line on TWTR Stock

Despite the stock’s downturn, not everyone has given up on the company. For instance, Goldman Sachs Group Inc (NYSE:GS) has reiterated its “Buy” rating on TWTR stock, and even increased its price target to $22.00. That implies a more than 45% potential upside! (Source: “Goldman Sachs Keeps Buy Rating on Twitter, Sets $22 Price Target,” Benzinga, April 27, 2016.)

Goldman Sachs analyst Heath Terry said, “We continue to believe that there is significant value in Twitter’s userbase, content, and interaction data that a stable management team and focus on product should be able to unlock.” (Source: Ibid).

Twitter stock might not be that attractive today, but the company is far from over.