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Twitter: An Early Look at Earnings Estimates

Posted
11/5/2013 12:45:00 PM
By: Minyanville
Referenced Stocks:CRM;GS;LNKD;MS;NYX

Twitter (NYSE: TWTR ) will come public on the New York Stock Exchange ( NYX ) this Thursday, and with the Wall Street punch bowl justifiably spiked , it's time to dig into how financial expectations are shaping up for the social media giant.

The big Wall Street firms like Goldman Sachs ( GS ) and Morgan Stanley ( MS ) that underwrite major IPOs typically wait 40 days to launch coverage on their new names.

But we fired up our Bloomberg terminal this morning and found that five research firms are reporting Twitter estimates, giving us an early sneak peak at forward estimates for the company.

Revenues

First, we'll take a look at the fourth quarter of this year, results for which will likely be reported in January. All eyes will be fixated on the revenue number, so that's a logical place to start.

Analysts are currently expecting $218 million in revenue, which assumes 94% year-over-year growth, a slowdown from the 105% achieved in the past two quarters:



On a sequential basis, this assumes 30% growth, which is down from the 36% growth between the third and fourth quarters of 2012.

In terms of annual growth, analysts again expect Twitter's rate of expansion to level off a bit, going from 102% in 2013 to 78% in 2014, and 54% in 2015:



EBITDA

Analysts expect a significant spike in EBITDA over the next few years, hitting $395 million in 2015:



Earnings

Expectations for Twitter's bottom-line profitability remain quite low, with annual losses projected through 2014 before a profit of $0.18 per share in 2015:



So Why Is Everyone So Pumped for Twitter if It's Making So Little Money?

It's tempting to point at Twitter's current losses and assume they're a big deal.

But remember that a good deal of Twitter's expenses are non-cash outlays like stock-based compensation, which investors will be happy to exclude when valuing the stock.

While accounting enthusiasts knock the concept of non-GAAP financial metrics, in the real world of momentum trading, they're not just generally accepted, they're universally embraced. If a company's revenue numbers are strong enough, they can get away with quite a bit.

I call this the "Universal Denial of Generally Accepted Accounting Principles."

It may not be "correct," but it's just the way life is. In fact, I would assume the above EBITDA and earnings estimates are non-GAAP, meaning they'd look much worse if they were fully GAAP-compliant.

Let's take LinkedIn ( LNKD ) as an example of how this kind of stuff plays out.

Here's a little table posted at the end of its last earnings report:



What do people care more about? The official GAAP EBITDA figure of $38 million (adding depreciation and amortization back to operating income), or the adjusted $92.8 million number that got LinkedIn to that aforementioned 24% margin?

Given that the stock is up 97% year-to-date, and 357% since its IPO, I'd say that investors are more than okay wth these types of adjustments.

If you need other examples, take a look at Salesforce.com ( CRM ), Splunk (SPLK), and Zillow (Z). These stocks would not be where they are if investors didn't embrace non-GAAP metrics.

And just like with these companies, Twitter will be forgiven for backing out expenses like stock-based compensation, allowing non-GAAP earnings to swell.

Twitter technically had an operating loss of $63.4 million last quarter. Back out stock-based compensation of $43.6 million, and you can cut that loss down by 69%. See how this goes?

Looking ahead, you can exclude those types of charges, and mix in ongoing revenue growth and a modest slowdown in operating spending, and voilà -- you have earnings!

Again, is this "correct"? Maybe not, but this is just the way the world works.

But What About That Measily $0.18 EPS Estimate for 2015?

Consider that number highly variable. There's potential for it to go up significantly.

Twitter's primary comparable peers, Facebook (FB) (61% EBITDA margin) and the aforementioned LinkedIn are tremendously profitable. In all likelihood, Twitter will be too. With its huge revenue growth, margins will inevitably rise.

The company is spending tremendous amounts of money on R&D (47% of revenues year-to-date), as well as sales and marketing (33% of revenues). This certainly won't be the case as the company hits $1 billion in revenues and beyond.

The Power of Excel

The bottom line is, anyone with basic spreadsheet skills can jerry-rig a huge earnings number for Twitter when looking a couple years out. You back out those non-cash items, pump up margin forecasts, and boom! Earnings materialize.

That preliminary 2015 EPS consensus of $0.18 could easily turn into $0.25 or $0.50, which of course flows into something like $3 or $5 or $7 per share years down the road -- the only limit is your imagination!

If Only It Were That Simple...

Years ago, I gave an wise old man an incredibly detailed bull case on a stock.

In response, he gave me a stern look and simply asked "How's the quarter?"

That's what matters here.

With high-octane momentum stocks, the market takes what happens today and extrapolates it until the end of time.

So it will be key for Twitter to deliver a dynamite fourth-quarter earnings report, something we should receive in January. Even though investors are incredibly pumped for this IPO, don't be lulled into a false sense of complacency. Twitter really does have to hit the numbers.

Why?

Because that could have investors pulling forward (meaning that $0.18 number goes up big time) or pushing back expectations for Twitter's profitability, and that will have a huge impact on the stock.

The actual future numbers don't matter; what's important for the bulls is that expectations keep rising. That's the mission.

Twitter: @Minyanville