) will come public on the
New York Stock Exchange
) 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
) 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.
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
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
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:
Analysts expect a significant spike in EBITDA over the next few
years, hitting $395 million in 2015:
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
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
) as an example of how this kind of stuff plays out.
Here's a little table posted at the end of its last earnings
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
If you need other examples, take a look at
(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
-- you have earnings!
Again, is this "correct"? Maybe not, but this is just the way the
But What About That Measily $0.18 EPS Estimate for
Consider that number highly variable. There's potential for it to
go up significantly.
Twitter's primary comparable peers,
(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
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
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.
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
The actual future numbers don't matter; what's important for the
bulls is that expectations keep rising. That's the mission.