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It’s understandable why some believe the recent Twitter (TWTR) stock makes no sense. After all, the social media platform operator did post strong results for the preceding quarter. Not only that, it’s moving ahead with its non-advertising monetization plans. I am bearish on this stock.
Twitter's monetization plans could pave the way for the company to deliver materially higher earnings in the coming years. In turn, this may help to sustain and grow its valuation. Yet investors, by-and-large, see it another way.
The crowd’s take is that Twitter will disappoint in the quarters ahead. That will be due either to activity on its platform making an unexpected drop, or from its monetization efforts failing to move the earnings needle.
So, in a battle between contrarian bulls, and bearish masses, who’s right and who’s wrong? For now, it's just as likely to stumble instead of to prove its skeptics wrong. In short, the stock appears primed to continue on its current downward trajectory in the near-term. (See Twitter stock charts on TipRanks)
Market Wrong about Twitter Stock?
Looking at the details, it’s clear why investors bullish on this stock believe that the prevailing sentiment is all wrong. Why? First, based on its most recent results, Twitter may seem set to meet or beat expectations in the coming quarters.
For the quarter ending June 30, the company slightly beat earnings per share, or EPS projections (8 cents actual versus 7 cents consensus). Revenue also came in higher than expected ($1.19 billion vs. $1.06 billion).
Secondly, the improvement to its outlook also seemingly bolsters the case for TWTR stock. Next quarter, the company expects sales of between $1.22 billion and $1.3 billion, an improvement from prior estimates of $1.17 billion.
Lastly, Twitter has a strong non-ad monetization strategy of creating revenue streams for services. Those who are bullish on the stock believe the company’s user, revenue, and earnings growth will continue to exceed expectations over the next five years.
Why the Bears May be Right on Twitter Stock
The bull case mentioned above may seem thorough and well thought out. Yet that doesn’t mean the bear case won’t be the one that plays out anyway.
Why? Twitter's revenue and user growth may have beaten expectations this quarter. Yet there’s no guarantee this will repeat itself in the quarters ahead. As the company is still valued on it delivering above-average growth, with its forward P/E, or price-to-earnings ratio of 63.99x, any sort of disappointment could result in a big move lower. That is, if investors decide to reassess its valuation.
Also, it’s still too early to determine whether Twitter’s monetization strategy will pay off, much less pay off in a way that results in its earnings becoming substantially higher than where they are today.
Putting it simply, despite its recent pullback, you can argue that this remains a situation where the upside potential is already factored in, with the stock having more to lose on dashed expectations, and less to gain if it meets/beats expectations.
What Analysts are Saying about TWTR Stock
According to TipRanks, TWTR stock has a consensus rating of Hold. Out of 22 analyst ratings, 7 rate it a Buy, 13 analysts rate it a Hold, and 2 analysts rate it a Sell.
As for price targets, the average Twitter price target is $74 per share, implying around 18.36% in upside from today’s prices. Analyst price targets range from a low of $54 per share, to a high of $90 per share.
Bottom Line on Twitter Stock
With its monetization strategy, and its higher-than-expected growth in the coming quarters, those long Twitter shares may be basing their bullishness on more than just hope and hype.
Yet while their take is well-thought out, that doesn’t mean it will play out as expected. Instead, the bearish take (which is more popular among investors right now) could prevail.
The company’s growth could slow down in the quarters ahead. Also, the above-mentioned monetization strategy could fail to deliver the types of earnings growth needed to sustain and grow the stock at its current price levels (around $62.52 per share).
It may be tempting to go contrarian, and “buy the dip” with TWTR stock. Yet, with the risk that it could sink lower due to further disappointment, this might not be a situation where the skeptics are proven wrong; instead, the bulls could be vindicated.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.