Twitter (NYSE:TWTR) stock has largely stayed in place since beating earnings expectations. The San Francisco-based microblogging company continues to improve on revenue generation. However, with stagnant user growth, one has to wonder how much this will help Twitter stock going forward.
Source: Christopher via Flickr
Although Twitter continues to refine its financial performance, with TWTR stock again marching toward 52-week highs, investors should wonder whether that can offer further benefit to the equity.
To be sure, Twitter has seen a fantastic turnaround. A little over two years ago, TWTR had fallen to a low of $14.12 per share. It spent much of 2017 near that level, and many, including myself, did not expect the stock to recover.
However, as management figured out how to better monetize the site, TWTR began a steady move higher. It rose as high as $47.79 per share the following June before pulling back.
At the current price in the $38 per share range, investors who bought in 2017 still have earned an excellent return. The question is where Twitter goes from here?
Twitter vs. Twitter stock
I believe Twitter will prosper as a site for some time to come. Twitter has gained a following among celebrities from President Trump on down that have made the site a go-to for information. The design of this website also precludes Facebook (NASDAQ:FB) from competing directly despite its much larger size.
Still, I’m not optimistic on Twitter stock despite these attributes. Slow user growth still plagues the stock. At 68 million monthly active users (MAUs), its numbers in the U.S. have remained stagnant for two years. Overall MAUs look slightly better. Twitter sees an estimated 269.6 million users worldwide, slightly ahead of the 250 million MAUs for Pinterest (NYSE:PINS).
Still, it represents only about a 3% jump from last year’s levels.
Even worse is the base of daily active users (DAUs). Twitter released numbers of DAUs in February. As of February, the site attracted 126 million DAUs. That figure indicates more engagement with the site despite the amount coming in at 39% of its user base. However, this comes in 60 million DAUs less than the main platform of Snap (NYSE:SNAP), Snapchat.
These lower-than-expected DAUs have had only a limited impact on Twitter. The previous quarter showed 18.8% year-over-year revenue growth. Earnings also came in well ahead of estimates.
The question is whether this growth can justify its valuation. Under current estimates, the forward price-to-earnings (PE) ratio comes in at 34.7. That might look reasonable given this year’s profit growth rate of 23.3%. Still, with earnings increases expected to fall to just 3.8% next year, that multiple seems high.
Moreover, the improvements have come from better monetizing its site. While encouraging, this can only delay the negative effects of stagnant user base growth for so long. Without more viewers, Twitter could eventually find itself struggling to continue its revenue growth.
Concluding Thoughts on Twitter Stock
The improved revenues and recent earnings beat will likely not offer further benefit. Twitter has accomplished a lot since TWTR bears such as myself were ready to leave the equity for dead.
However, improved revenue performance has inspired a comeback despite slow growth in MAUs. These site improvements will sustain Twitter for a time. However, the company will eventually have to attract more user growth to gain any long-term traction.
That said, I would encourage traders to take another look if TWTR pulls back. Investors will have a more solid buy case for Twitter stock if it falls back to the high $20s per share level like it did last fall. However, with it approaching the $40-plus per share levels it saw last summer, any near-term upside is limited.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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