Can Twitter convince investors of a strong investment case?

With the stock trading in-line with analysts’ consensus 12-month price target of $16.97, at current levels it seems we are going to need to hear an upbeat outlook to cause a material uplift to earnings forecasts.

Twitter (TWTR) do have a strong history of beating the market's consensus earnings estimates, having beaten consensus earnings-per-share (EPS) estimates for eight consecutive quarters and five of the past eight sales numbers. Importantly, the share price has only actually rallied on two of those occasions, so with a stock like Twitter, it is never just a case of beating quarterly earnings estimates. Investors and analysts always want to hear more about the ability to grow future earnings.

The investment case in Twitter is hardly compelling, especially relative to names like Facebook (if you want growth) and names like Expedia or eBay (as value plays). We have seen executive turnover in key positions, a sharp slowdown in monthly active user (MAU) growth (MAU growth stood at 24% in Q2 2014 and has fallen consistently to 3.3% in Q3 2016), which has provided challenges in growing advertising revenue. There is also growing competition, with Instagram now having 600 million active users and Snapchat also in play, although I am highly sceptical of this name longer-term.

The market will be looking at trends in these areas while focusing on costs and the impact layoffs have had in supporting margins. Time spent on Twitter will also be worth watching, especially with many feeling we could see a weak number in the wake of the US election, despite all the focus on Trump using TWTR as an avenue to communicate to the world. Naturally, analysts will be keen to look at how the company fares relative to current expectations, so it is worth flagging that the consensus expectations for Q4 EPS are 11.9c (down from 13c in Q3), on revenue of $740 million and gross margins of 68%.

Looking ahead to the 2017 full-year numbers, the market expects EPS of 60c, on revenue of $2.794 billion. This is really important as the market will aggregate all the aforementioned variables and assess whether this is too low or even too high.

With the consensus earnings figures in mind, we can see TWTR trading on 28x forward earnings and 8.4x sales, which is a lofty premium to Facebook. Aside from valuation, Facebook also has a far better balance sheet, more stable management structure and has more compelling catalysts to drive earnings growth over the coming 12-24 months. If anything, with the longer-term challenges the company faces, I would be looking to short TWTR into strength. This name becomes expensive into $18-$19 but perhaps the most positive thing going for TWTR is the fact that it is quite unloved by the street, although short interest is actually very low.