Twitter Stock Very Easily Could Push Beyond IPO Highs
The reputation Twitter (NYSE:TWTR), as well as Twitter stock itself, has been on the rise in recent months. As its much larger rival Facebook (NASDAQ:FB) remains mired in political controversy, the San Francisco-based social media firm continues to attract engagement, and by extension, revenue.
Given its valuation and its path to growth, I think TWTR has finally positioned itself to return to its post-IPO highs.
Multiples and Profits Are Compelling
In my October, I stated that a buy case had begun to emerge on Twitter stock. Since that time, TWTR has risen by 15%. This occurred despite the negative direction that most tech stocks, including Facebook, have taken this fall.
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Also, the valuation metrics look reasonable. Twitter \ trades at 42 times earnings. Admittedly, that comes in higher than the price-to-earnings (PE) ratio of Facebook. However, Twitter has experienced less of the political and privacy-related troubles that weighed FB stock down.
More important, Twitter proves that one does not have to pay the higher multiples of an Amazon (NASDAQ:AMZN) or Jack Dorsey’s other company, Square (NYSE:SQ), to buy a high-growth stock.
Analysts predict an average of 43.3% profit growth per year for the next five years. In comparison, Wall Street places Square’s growth for the same period at 52.5%.
However, buyers will pay a multiple more than three times higher than Twitter’s current PE to buy into SQ’s growth. Twitter stock once traded at almost $75 per share. Such metrics indicate TWTR could reach that price again, this time, with profits to back it up.
Furthermore, unlike Snap (NYSE:SNAP), Twitter controls its niche. While Facebook could buy Twitter in theory, it has shown no public inclination to make such a move. FB probably also learned from Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) that creating a “Google+ of Twitter” would likely fail.
Twitter and Political Controversy
The greatest threats to Twitter involve instances that could lead to this “Google+ of Twitter” actually succeeding. TWTR faces less severe but potentially impactful political headaches.
Allegations of bias against conservatives still plague the company. Since political discussion plays an important role in Twitter’s audience engagement, alienating half of the political spectrum could potentially lead to a mass exodus from the site.
Our own Luke Lango brings up an interesting point that Fox News has stopped using the Twitter. Interestingly, Fox’s right-leaning anchors still post to the platform, so this lack of activity may have occurred for other reasons.
However, the relative lack of Facebook-like troubles has become a recent draw to TWTR stock. Picking political favorites would not serve Twitter’s interest or that of its stockholders.
Twitter’s Lagging user Base
Aside from politics, Twitter also needs to resume the growth of its user base. Its monthly active user (MAU) count in the U.S. has remained between 67 million and 69 million for more than two years.
The global MAU count of 326 million in the third quarter represented its second straight decline in MAUs.
Despite stagnant user growth, advertising and data licensing increased revenues by more than 25% in the most recent quarter. This has boosted Twitter in the last few months. However, long-term Twitter will need MAU growth to drive higher revenues.
Still, I expect TWTR will choose engagement over politics. Also, as Twitter enhances its abilities to drive revenue, its stock should see the benefits.
Final Thoughts on Twitter Stock
The multiple and the profit growth of Twitter indicates that TWTR could finally begin to fly. This fall, Twitter stock has risen as arch-rival Facebook and most tech companies such their stocks fell. As a result, TWTR supports a relatively low PE ratio considering its 40+% predicted long-term growth rate.
Despite these projections, Twitter has faced some level of political controversy. Also, its stagnant MAU growth could bring troubles later.
However, with massive revenue growth and continued improvements to monetize the site, Twitter stock holds a great deal of potential to return to and perhaps surpass its all-time highs.
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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