second-quarter results, investors may have a sense of déjà
Just a year earlier,
staring down a wall of cynicism -- and delivered
. Shares delivered huge upside on that second-quarter report a
year ago, and went on to deliver even more impressive gains over
the following year.
Facebook's problem back then was quite simple: It had a huge
user base but wasn't making much money off of those users. That's
no longer the case.
Those same concerns dogged Twitter, though as
I noted last month
, the drivers were in place to enable Twitter to deliver much
stronger quarterly revenues than analysts had been anticipating.
Frankly, Twitter only needed decent upside to see its shares move
out of the doghouse.
As I wrote in June: "Analysts expect Twitter's second-quarter
sales to rise more than 10% sequentially, which would be good
enough to change the tone of conversation around this broken
stock. A 'glass half full' perspective (instead of 'half empty')
could push this stock right back to $40."
As it turns out, Twitter did a whole lot better than that.
Twitter's second-quarter sales surged 25% sequentially (to $312
million, above the $283 million consensus), and shares rallied
roughly 25% to around $48.
When you consider that Facebook went on to double, even after
delivering its solid second-quarter report a year ago, it's fair
to wonder: Is Twitter also headed a lot higher?
The short answer: higher, but not a lot higher.
First, let's discuss the negatives. While Twitter posted a 24%
year-over-year gain in users, a fair bit of that growth was due
to the World Cup. As a result, growth in the user base is likely
to be less impressive in the current quarter. Also, even as
Twitter delivered solid earnings before interest, taxes,
depreciation and amortization (EBITDA) in the second quarter ($54
million, compared with the consensus forecast of $30 million),
management concedes that internal spending will be so strong in
the current quarter that EBITDA is likely to shrink
One of the key investor concerns has always revolved around
long-term profitability of this business model, and those
concerns haven't gone away. Estimates of what kind of EBITDA
Twitter can generate by 2016 are all over the map: Deutsche Bank
pegs that figure at $541 million, Pacific Crest Securities pegs
the figure at $900 million while Merrill Lynch anticipates $1
But the company is now worth nearly $35 billion, and to
justify that valuation, investors must be confident that EBITDA
in 2017 and 2018 will be far higher.
Yet the positives in place for Twitter are quite impressive.
• Roughly $5 in revenue per monthly average user (MAU), which
is up sharply from prior quarters (but lags Facebook's $10 per
MAU metric). Twitter is in the midst of delivering more ads per
page, so that metric is likely to climb higher in coming
quarters. "The 'MAU-Monkey' appears to be off Twitter's back,"
note analysts at Deutsche Bank, who just raised their price
target from $52 to $60.
• Twitter is also aggressively pursuing other ad formats (as I
noted in my second-quarter preview in June), "and we think these
formats have the opportunity to maintain 100%+ revenue growth for
several quarters," note analysts at Merrill Lynch, who just
raised their target price from $40 to $60.
• Even after adjusting for the strong second quarter, analysts
may still be under-estimating Twitter's financial momentum:
"Full-year revenue and EBITDA guidance, which looks easily
beatable, was raised and is above consensus," note analysts at
Topeka Capital Markets, who boosted their price target from $60
to $62. If analysts only boosted forecasts up to the level of
management guidance, then these analysts are suggesting that a
few more "beat-and-raise" quarters are in store for Twitter.
Though shares appear poised to keep rallying in coming weeks
and months, investors shouldn't anticipate the same surge as
Facebook delivered over the 12 months following its terrific
second quarter. That's because Twitter is already pricey. Take
BMO Capital's $48 target price as an example. That target
reflects a 16 times multiple on 2016 revenues, "which compares
with FB at 12.4x and
at 7.4x," according to BMO. As Twitter rises higher, that
valuation gap will become even further stretched.
Risks to Consider:
Twitter's shares surged so much this week simply because most
analysts and investors were caught off guard. That element of
surprise is now gone for future quarters, unless Twitter delivers
third- and fourth-quarter results that are also far above the
consensus. The current share price already reflects some upside
relative to the newly revised sales and EBITDA forecasts, and any
lack of upside would penalize this stock. To be sure, I thought
that Facebook had lost the element of surprise after its great
quarter a year ago, but shares have continued to power ever
Action to Take -->
Facebook and Twitter have delivered a clear lesson to investors:
A young, newly public company is often hard-pressed to live up to
the hype, and within a few quarters, can deliver tepid results
and fall out of favor. But such stocks are worth renewed
investigation at that point, as they may just be taking a little
time to let their business model gel. That's an important lesson
to heed right now as so many companies have gone public in recent
quarters. Some of them will stumble in the early going, as
Facebook and Twitter did, which often provides a nice second
chance to buy appealing business models.
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