Twitter: Declining Profit Margins Are a Hurdle

Twitter, Inc. (TWTR) is a social networking company that connects a user to a network of people, ideas, news, opinions, and information.

Shares of Twitter have losses of about 19% in 2021. The past three-month period has been hard for this social media stock, with losses of about 34%. Will the new CEO be able to turn around Twitter in 2022? I am bearish on TWTR stock. (See Analysts’ Top Stocks on TipRanks)

Twitter Business News

The management of any publicly-traded company is a key catalyst that can move its shares, taking all important decisions related to efficiency, growth, profitability, implementing the strategic vision and goals. Late last month, Twitter announced that Jack Dorsey had decided to step down as Chief Executive Officer and that the Board of Directors has unanimously appointed Parag Agrawal as the new CEO.

What is interesting to mention is that upon the announcement of the new CEO, Twitter stated, "There are no changes to the company's previously shared outlook for the fourth quarter and full-year 2021, or its 2023 goals." This may simply mean that it is too early for the new CEO to implement key changes, and investors should be patient over the next quarters.

Earlier in October, Twitter announced it had entered into a definitive agreement to sell MoPub to AppLovin for $1.05 billion in cash. Jack Dorsey, Twitter CEO at that time, said, "This transaction increases our focus and demonstrates confidence in our revenue product roadmap, accelerating our ability to invest in the core products that position Twitter for long-term growth and best serve the public conversation."

One of the key challenges for Twitter in 2021 and over the next years will be global regulations and scrutiny over the news. An example is Russia, which fined Twitter 3 million roubles ($40,920) for failing to delete content Russia deemed illegal.

Social media stocks Snap (SNAP) and Twitter have faced hard times in recent months as a result of advertisement-tracking privacy changes to Apple devices, a decision which made several analysts cut their price targets on both social media platforms.

Q3 Earnings: Misses EPS, Beats Revenue

TWTR stock earnings have a mixed history of beating and missing estimates. Q3 earnings were a big miss with EPS of -$0.54 versus the estimate of $0.17. Revenue of $1.28 billion beat by $1 million and grew 37% year-over-year.

Monetizable daily active users (mDAUs) figure was a miss, coming in at 211 million versus 211.9 million expected by analysts.

Total advertising revenue was $1.14 billion, an increase of 41%. Data licensing and other revenue totaled $143 million, an increase of 12%. Twitter reported a negative operating income of $743 million because of a one-time litigation-related net charge of $766 million and due to ongoing investments.

The financial outlook for the fourth quarter of 2021 is mixed. Twitter expects $1.5 billion to $1.6 billion in revenue for the fourth quarter, which will be up 24%, and operating income in the $130 million to $180 million range, a decline of 29% compared to the prior year. This weak guidance was not expected, adding selling pressure to TWTR stock.

Fundamental Risks

The sales growth rate has declined over the previous three consecutive years, and the company reported a net loss of ($1.14 billion) in 2020. Two main factors that are of significant concern are declining operating and net margins. Operating margins in Q1, Q2, and Q3 2021 were 5%, 3%, and -58%. Net margins in Q1, Q2, and Q3 2021 were 7%, 6%, and -42%, respectively.

In Q3, the cost of revenue increased substantially by 34% to $484 million. With profit margins declining, Twitter will have to address these issues soon, exploring other sources of revenue. 


Twitter is relatively overvalued based on its price-to-book ratio (4.9x) compared to the U.S. interactive media and services industry average (3.2x).

Wall Street's Take

Turning to Wall Street, Twitter has a Hold consensus rating based on six Buys, sixteen Holds, and two Sells assigned in the past three months. The average Twitter analyst forecast of $66.73 implies a 53.6% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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