With a solid track-record of delivering earnings surprises over the past several quarters, Twitter (NYSE:TWTR) is expected to report first-quarter results tomorrow, before the opening bell.
Twitter's stock has been in a sideways channel for the past 6-months between $30 to $35. In order to break out to new highs, the company needs to deliver a solid quarterly revenue and earnings beat. However, the risk is less to the downside, as the company trades at a fairly reasonable P/E ratio of 22.05, which implies that investors aren’t really pricing-in a whole lot of growth. If the company were to surprise on financial results, the multiple could quickly expand.
Analysts anticipate revenue growth to taper off, as there might be fewer opportunities to increase advertising load, and pricing might not improve as much given the slowdown in user growth metrics. Currently, the consensus anticipates 14% sales growth over FY’19 and FY’20. Expectations tied to revenue growth seem doable, as Twitter has grown sales at a much higher clip in FY’18 by 24 %.
Michael Pachter from Wedbush released a research note detailing expectations tied to Twitter earnings:
"For Q2:19, we expect revenue of $830 million (up 17% year-over-year and 6% quarter-over-quarter, vs. growth of 24% year-over-year and 7% quarter-over-quarter in Q2:19) and adjusted EBITDA of $317 million (up 20% year-over-year), reflecting an EBITDA margin of 38%, and roughly 100 bps of year-over-year margin expansion. Current consensus estimates for Q2 are for revenue of $819 million and adjusted EBITDA of $279 million. We estimate sequential mobile DAU (Daily Active User) growth of roughly 1 million in Q2, reflecting flat mobile DAU growth in the U.S. and growth of 1 million mobile DAUs internationally."
Pachter has maintained a Neutral rating and $37 price target on Twitter heading into the quarterly earnings report. (To watch Pachter's track record, click here)
Currently, the consensus expectations tied to the stock seem extremely conservative with analysts mostly interested in the improving profit narrative.
The set-up implies a steep drop-off of 10 percentage points of revenue growth over the next 24-months based on consensus expectations. The diminished expectations seem priced-in, and the stock trades at a relatively reasonable valuation at 22x earnings. So valuation is less of a concern because there’s some cushion given the diminished expectations tied to FY’19 and FY’20 sales, but the operating profit margin will need to trend higher by 1 percentage point to keep the profit narrative going.
Also, Jack Dorsey recently presented at a TEDx conference, which showed some of the strategy changes that might be taking place at Twitter. Though, the event was not directly related to shareholders, Dorsey seemed fairly presentable when discussing the engagement metrics that they should emphasize less going forward. Most importantly though, he discussed some of the changes that he has made after becoming CEO, which involved scaling back the organization (hence the optimization towards profitability), and not ruining the pre-existing app experience. Dorsey also floated the idea of de-emphasizing certain “like” and “follower metric” signals if he could do it all over again but given the popularity contest of social media those metrics are unlikely to go away.
If Twitter does deliver a sudden surprise like it did in 2018, the stock could easily rally by a significant amount, but if not, a 22x earnings multiple isn’t likely to sink by much either. In terms of where the app might improve, there’s no clear path, other than the idea of improving moderation and community enforcement, and better engage audiences with open conversations.