Whether you look at TWTR from a technical, quantitative or fundamental basis, it is hard to make a case that does not see it under pressure in the short term. The market sees this too, as the fall in the share price could be construed as a company that is a niche business and is unable to properly monetise its product, as advertisers question the penetration of ad dollar spent on the micro-blogging site.
With a consensus-blended forward P/E ratio of 422 times, and a falling month active user base, the market has every right to ask the same questions.
However, Nomura has upgraded its call on TWTR to a buy, which might explain the 10.7% jump in the share price overnight. The report believes TWTR now has a target price of US$43, implying a 27.5% upside from the closing price.
It sees five major reasons for upgrading the stock and sees TWR with a P/E ratio of 24 times its 2017 earnings per share expectations on these five points:
- TWTR is not a niche product and at current price, Nomura sees deep risk/reward returns as product enhancements take hold.
- Increasing monetisation velocity per user; it sees TWTR as the fastest growth player in the sector. Nomura sees ad budgets steadily shifting to TWTR, which will drive robust monetisation in FY16 and 17.
- International users are only just scratching the surface; 80% of all TWTR users come from outside the US, but only 28% of revenue in the first quarter came from this market. Nomura believes TWTR has an untapped resource at its disposal.
- Margins will be higher; TWTR operates in a relatively fixed operating structure, seeing an incremental move over time as revenue and ad prices increase. Nomura currently sees the Street seeing TWTR achieving a margin 30%. It is forecasting margins to be in-line with Facebook at 60% to 70% over the coming two years.
- Raising revenue estimates; Nomura has lifted its revenue and earnings before income tax, depreciation and amortisation (EBITDA) estimates to better reflect monetisation and margins; it sees TWTR generating earnings of $2.19 per share by 2017.
These are valid assumptions and the case for TWTR to reach these targets seems achievable, however it does not excuse the fact that ad dollars are currently indifferent to the market penetration on the site.
Yes optimisation upgrades are coming, but the lessons learnt from Facebook linger; major advertisers left the site in the beginning as it was not seen as beneficial to marketing planning, and it took a lot of hard work to get them to return.
The other part of TWTR that is unknown is longevity. Will its users move to more ‘now’ and targeted sites? If this is the case, will TWTR have to follow Facebook’s lead and buy its way to the users through acquisition? This is something it may not have the ability to do.