When good isn't good enough

Twitter has released a strong report, although investors have fled the stock in droves in after-market trading, pushing it 10% lower.

Source: Bloomberg

The Q3 earnings numbers are generally above The Street’s expectations, with Q3 revenue growing 114% to $361.3 million, relative to expectations of $351 million. Q3 (adjusted) EBITDA at $68 million was 28% above expectations, while the adjusted earnings per share was smack-bang in line at 1c.

Average monthly users increased 23% to 284 million, with 80% of these users now coming from mobile. These figures again seem very much in line with expectations. However, the pace of user growth has slowed somewhat from the 24% growth rate we saw in Q3 2013. Ad revenue per 1000 timeline views (perhaps the key measure of monetization) grew 83%, which was above The Street’s estimates, but a strong deceleration from the 99.8% seen in Q2.

Looking forward, the social media giant increased its outlook for full-year revenue to $1.37-1.38 billion, which seems to be above the current market consensus. They have increased their assumption on EBITDA to $260-265 million.

So the numbers themselves are good relative to expectations, and certainly don’t justify such a savage sell-off in the after-market. The fact the stock trades on a multiple of 150x forward earnings is not really the key concern, as traders have been happy to pay up for expected rapid growth, especially after the recent lock-up period. With mobile clearly improving and showing signs of rapid growth, Twitter remains one of the best ways to play mobile.

We need to remember the stock had seen a 90% rally from May to October and, while valuations are stretched, things don’t look so terrible if you push your timeframe out to 2017. The key risks investors have been concerned with were a slowdown in product innovation (something traders will be keen to hear more about from the CEO today), increased competition and a slowdown in monthly average users. Given the pace has slowed from Q2, you can see why we have seen a reaction in the after-market.

Technically, the various oscillators suggest strong upside may be hard to come by. Certainly, if we look at the daily chart, we can see Twitter has broken near-term trend support at $45.62. Whether the stock can regain the former trend could be key in upcoming trade, but the bulls will have their work cut out. However, it seems the buyers have supported the stock around key horizontal support (the July high and range of lows seen in August), so the bulls may look to step in around the $42.50-to-$43.00 area.

All-in-all, the result looks good, but when the stock has performed so strongly and trades at such a lofty valuation, it seems ‘good’ is not enough. We have seen signs that average user growth and some of the key monetization metrics are slowing, so it seems a few traders are seeing vulnerabilities. Watch price action in upcoming trade, given the stock is testing key support in the after-market.

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