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Twitter Stock May Be Rangebound, but There Is a Way Forward

Tezcan Gecgil

Twitter (NYSE:TWTR) has rewarded shareholders well in 2019. Year-to-date, Twitter stock is up almost 30%. The strong recent performance of the shares has been based on robust execution by management.

How to Profit From Twitter Stock Whether or Not It Breaks Out of Its Range

Source: Freestocks via Unsplash

Last quarter’s results showed that Twitter, one of the biggest social networks globally, is making more money than ever before as it delivered its sixth profitable quarter in a row.

Going forward, I expect the positive trend in earnings to continue as Twitter is beginning to offer shareholders quite a lot to be excited about. However, especially given the increased level of volatility in the markets, there might be some profit taking in TWTR in the next few weeks.

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Long-Term Tailwinds for Twitter Stock

There are several catalysts that may help Twitter stock price reach new highs in the coming quarters.

On April 23, the company reported Q1 2019 earnings. The group’s total revenue reached $787 million during the quarter, an increase of 18% year-over-year (YoY).

Twitter’s revenue comes form two main sources:

  • Advertising, and
  • Data Licensing and other.

Twitter’s Q1 advertising revenue came at $679 million, an increase of 18% YoY. More than 80% of Twitter’s advertising revenue comes from mobile devices.

Most of the advertising revenue is attributed to promoted products (such as tweets, accounts and trends) that the company sells to advertisers. Advertisers can also pay for in-stream video ads which the platform delivers to a targeted audience.

Video advertising now accounts for more than half of Twitter’s ad revenue.  The company will be able to monetize the videos on its website more effectively as it captures a higher percentage of ad spending that is moving to digital video. Twitter owns Periscopea live video streaming app.

In general, video has far higher engagement than text or banner advertisements.  To incentivize video makers, Twitter gives the creators 70% of the ad revenue.

Other Income and Twitter Stock

Data licensing and other revenue in Q1 totaled $107 million, an increase of 20% YoY. Data licensing business involves providing additional information to companies about tweets.

Recently, the company has started offering cheaper data access packages to smaller companies, a move that is likely to increase its revenue further. The “other sources” include service fees Twitter collects from users of its mobile ad exchange, MoPub.

So far in 2019, management has credited the U.S. market for much of the positive momentum. Going forward, Wall Street expects Twitter’s high-margin data licensing revenue to be boosted by further international expansion, as the number of overseas TWTR users are increasing, especially in the developing world. Its latest earnings call noted that the total international revenue was $403 million.

Adjusted free cash flow came in at $271 million, a huge increase versus $135 million in the same quarter last year. Twitter believes that adjusted free cash flow provides useful information on the stock to investors as it regards it a more conservative measure of cash flows.

In short, over the past quarters, TWTR has made encouraging progress in terms of revenue and cash flows. And its stock price in 2019 reflects the optimism surrounding the fundamental numbers. Its market cap now stands at almost $30 billion.

Niches and Twitter Stock

Twitter is possibly best known for connecting people in real time. As the world’s best-known micro-blogging platform, Twitter is used by politicians, journalists and global brands.

Many readers see breaking global news or the opinions of “famous” people on Twitter first. Possibly starting with President Trump, the platform has many influencers, including politicians and business leaders, on its roster. Analysts realize the power of Twitter’s platform, especially during elections as well as live events, such as sports tournaments.

For a network like Twitter, it is crucial to be able to monetize its daily users. In its Q4 2018 earnings report released in February 2019, the company revealed its monetizable daily active users (mDAU) for the first time.  The number at the time was 126 million daily users.

Q1 numbers of April showed that the number now stands at 134 million. Management is focused on growing this metric. Twitter only counts users who could be exposed to ads — its “monetizable” audience.

Understandably, as the platform use increases, Twitter is better able to bring advertisers on board and of sell ads at better prices. Thus its margins expand, too. Many investors have since cheered the increase in this number as they feel that there is further room for the company to grow, translating to a potential increase in the Twitter stock price.

Finally, Twitter management has emphasized how important it is for the company to improve the health of its platform, i.e. taking out fake or spammy accounts and trolls. The platform is employing machine learning models to detect and stop abusive tweets or malicious content in videos.

Quality accounts would better translate into stronger engagement and monetization. And then advertisers would even be more open to use the microblogging platform.

Economic Slowdown Threats to Twitter Stock

Maybe the current decline we are seeing in the markets is a blip. Or maybe the trade wars will dominate the headlines for the rest of the quarter or even longer.

Yet even before investors became worried about the trade dispute rhetoric earlier in May, I have been noticing more mentions of the dreaded “r” word in the media.

While analysts are divided as to whether many economies, including the U.S., could be headed toward a recession in the near future, any further tension between the U.S. and China could easily result in an economic slowdown.

And in case of a prolonged economic downturn, many businesses could cut ad budgets. As Twitter needs to bring in advertising dollars, maintaining positive revenue, strong margins, and earnings growth might become difficult for management. Over time, share prices and especially earnings expectations tend to move in tandem.

Social media has become an integral part of many people’s daily lives. Twitter’s main competitors include Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), and Snap (NYSE:SNAP). They all go after advertising budgets of companies and individuals and bank on the confidence that the economy will continue to expand.

Advertisers aim to reach the widest possible audience with their messages per dollar invested. If the economy is not on a prosperous footing, then marketing executives will be a lot more selective in terms of their social media advertising.

If revenues begin to decline, then Wall Street might begin to question the current valuation of Twitter stock. After all, many argue that Twitter stock is not cheap. It currently sells at 22x trailing P/E ratio.

As of this writing, the P/E for S&P 500 is 21. Let us remember that the average P/E ratio for the index is about 15. If the broader U.S. market declines closer to their average P/E ratio, then it is likely that Twitter stock will also decline. Hence the health of the economy in the U.S. and globally may end up affecting TWTR stock price adversely.

Technical Charts

Following its earnings report, in late April TWTR saw $40.92, a high for the year. However, in the past three weeks, it has given back some of its gains, mirroring the broader market weakness since May 6.

Now that the quarterly earnings season is behind us, many momentum stocks tend to trade on the back of daily news headlines, especially the U.S.-China trade wars, which may increasingly become tech wars. In other words, if the internet services industry which Twitter is part of, other social media companies, or the broader market decline, Twitter’s stock may also be adversely affected.

Between now and until its next earnings report in late July, I expect Twitter to fall below $35, even towards $32.50, where it has major support. Then Twitter may trade sideways, possibly between $32.5-$35.

It’s almost impossible to time a top and a bottom in the markets. However, the technical charts are not quite ready to forecast another big spike in Twitter anytime soon.

The Bottom Line on Twitter Stock

In the coming weeks, there might be more volatility and even a decline in Twitter stock. However, I believe the company is likely to have many robust earnings reports ahead of it.

The group has started and continued 2019 strongly, posting both revenue growth and user growth. Therefore long-term investors may use any short-term weakness on TWTR stock as an opportunity to own the shares.

Finally, takeover rumors of Twitter have been around for several years. The three potential names to buy the company could be Alphabet, Salesforce.com (NYSE:CRM) or Disney (NYSE:DIS). Such an acquisition would, of course, be cheered by existing shareholders.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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