For 2018 I’m going out on a ledge and looking for Twitter Inc (NYSE:TWTR) to defy the odds and have a good year. Twitter is one of the most polarizing stocks out there today and it elicits strong emotions on both sides of the coin. Most of the sentiment seems to be negative still, but that’s where I think we may just have an attractive investment opportunity.
We all know what Twitter is by now, and most of us are familiar with what a train wreck of an investment it has been in its short life as a public company. However I believe that co-founder and CEO Jack Dorsey is helping the company find its place in the 21st century media landscape and has a team in place that is finally ready to take this business to the next level.
Whoa Whoa Whoa, Stop the Clock
It appears management’s efforts to get the growth engine going again at Twitter are starting to pay off. Daily active users (DAU) were up 14% in the third quarter, marking the fourth consecutive quarter of double-digit growth. Monthly active users (MAU) of 330 million also grew 4 million users from a quarter ago. The nature of Twitter’s platform makes DAU a better indicator of engagement and use. While management does not disclose the number of DAUs it’s currently less than 50% of MAUs meaning there is plenty of opportunity for growth.
Total ad engagements doubled for the quarter with cost-per-engagement down 54% from a year ago. Also encouraging is that Twitter’s top 100 global advertisers spending was up 23% from the year ago. With more than 830 live streamed events in the quarter and 74% of those streamed to a global audience there is clearly something here that management is building on and continued focus on machine learning will help stoke organic discovery and ideally bring relevant, personalized content to the top for all users.
Expenses tracked down 16% from a year ago and at less than 20% of revenue now stock based compensation (SBC) is slowly but surely coming under control. Old advertising partners are coming back and new partners are coming on board as management is demonstrating more attractive ROI on newer advertising products thanks to the focus on video and other platform improvements.
For now investors are stuck with revenue projections and “adjusted EBITDA” for earnings which is about as comforting as a visit to the proctologist. On a price to sales basis Twitter shares are trading at a multiple of about 6.5 versus Facebook’s 13.5 and Snap’s (cough) 25.5.
According to Capital IQ estimates analysts on average expect Twitter to bring in a bit over $2.5 billion in revenue in 2018, just a tad more than what it recorded in 2016 but most definitely a reacceleration from 2017’s likely numbers. If it can hit or beat this mark, continue to bring down stock-based compensation and become profitable, well let’s just say I like the chances of the market paying a little bit more for a growing business that’s actually making some money in the process.