With the tech stocks having taken a beating over the past
month, a number of interesting buying opportunities are out there
for long-term investors. And it's not every day you get a second
chance to invest in an IPO.
#-ad_banner-#That's because it's unusual for a company to
trade below its IPO price less than six months after debuting in
the public markets. However, shares of
are now trading below the closing price from their IPO debut.
has been hammered this week since the company reported
first-quarter earnings -- shares have fallen to well below $40 a
share as of this writing. The prime factor in the plunge may be
that the quarter was the fourth in a row in which Twitter saw
Analysts and investors have also focused on subpar engagement
metrics. Total monthly active users came in at 255 million for
the quarter, below expectations of 257 million, and Timeline
views totaled 157 billion, compared with the consensus estimate
of 165 billion.
However, the quarter wasn't all that bad. Revenue and EBITDA
(earnings before interest taxes depreciation and amortization)
beat estimates, and Twitter's forecasts for the second quarter
and full year were in line with analysts' expectations. The
year-over-year growth in total monthly active users and Timeline
views came in at 25% and 15%, respectively.
One of the big positives from the quarter is was that
Twitter's ad sales continue to gain strength. Toward the end of
2013, Twitter introduced a flurry of new products to increase ad
revenue. Thanks to these, ad revenue came in at $226 million,
which beat expectations of $220 million and represented increases
of 125% from the same period last year and 121% from the previous
Twitter has settled into pattern of mature growth. Investors
have obviously taken this as a sell signal -- but assuming
Twitter continues to find new ways of monetizing its nearly
quarter-billion monthly active users, this could be a buying
Twitter's plunge this week is the product of a perfect storm
of negative news. Compounding the negative reception to its
earnings is the fact that Twitter is one of the top momentum and
high-growth stocks, and this sector has been beaten down over the
past month. Even the sector's biggest names --
-- are down 10% or more over the past month.
The next big hurdle is the lockup expiration (where insiders
can sell shares that they couldn't at the IPO) on May 5. This is
Twitter's first major lockup expiration. Key insiders will be
able to sell 500 million shares, but many of Twitter's key
insiders -- including CEO Dick Costolo and co-founders Evan
Williams and Jack Dorsey -- have said they'll be holding on to
Twitter has settled into pattern of mature
growth. Investors have obviously taken this as a sell
signal -- but assuming Twitter continues to find new ways
of monetizing its nearly quarter-billion monthly active
users, this could be a buying opportunity.
The biggest question mark for Twitter is its ability to
attract users and keep them engaged. Twopcharts, a third-party
site that tracks usage on Twitter, has found that 44% of
Twitter's accounts have never sent a tweet. But Twitter is
looking to change this: It has revamped its look and feel, making
it similar to Facebook, and made photo tagging easier.
The near-term pressures are overshadowing some of the
long-term growth opportunities that Twitter is yet to embark on.
First of all, Twitter has been flying under the radar when it
comes to acquisitions.
Its latest acquisition was Gnip, a reseller of Twitter data.
This acquisition should increase Twitter's data licensing
revenues, which made up 10% of total revenue in 2013. Twitter
also recently acquired Android lock-screen app Cover.
Twitter has also acquired two European TV analytics firms this
year; it already owned the top two U.S. TV analytics firms,
Trendrr and BlueFin Labs. Twitter's connection to television is
one of the key growth opportunities. It should have no problem
signing up brands that are looking to target large TV
Twitter's growth story is not just about attracting users but
advertisers as well. The global mobile ad spending market is
expected to grow to $32 billion in 2014, which is over a fourth
of the total digital ad spending worldwide.
Less than a year ago, Twitter started allowing brands to
target users with images and videos. And the company still has a
number of things it can do to encourage more advertisers to trade
in Facebook for Twitter. This includes offering tailored
audiences, conversion tracking, and tailored TV conversations to
advertisers -- in addition to the company's own e-commerce
Shares of Twitter are trading at a price-to-earnings (P/E)
ratio north of 170 based on next year's projected earnings. But
, one of social media's success stories, traded at a P/E of over
500 just a couple of years ago. Since LinkedIn's IPO in 2011,
LNKD is up over 80%, which is more than double what the S&P
500 Index has returned in that time.
Twitter could also grow into its valuation, much like LinkedIn
has. Twitter's earnings growth expectations are quite impressive.
Analysts expect earnings to come in at $0.02 a share this year --
but grow 11-fold in 2015, to $0.22.
Risks to Consider:
The competition for ad dollars is intense, where Twitter is
going head to head with the likes of Facebook. Twitter also
relies heavily on mobile, where mobile ads account for over 70%
of revenues. And TWTR is still a very expensive stock, yet to
generate positive earnings. This makes the stock very volatile
and susceptible to large sell-offs. (My colleague David Sterman
has been keeping a
Action to Take -->
Investors with a high risk tolerance should consider buying
Twitter. Shares are off more than 40% their all-time high, and
investors can pick up the stock near its IPO debut price.
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