Twitter Inc (TWTR) is a social media giant that I’ve had my eye on ever since it’s wild initial public offering last November.
While I’ve always liked Twitter’s potential, TWTR stock has moved sharply in both directions in the year that it’s been public, but it finally appears to be stabilizing.
After reporting a somewhat disappointing third quarter in late October, TWTR stock remains well below its all-time highs.
However, with growth potential for Twitter still strong and several catalysts in the works, I believe TWTR stock is poised to make another move higher ahead of its fourth-quarter earnings report, making it an attractive buying opportunity at its depressed prices.
If the most recent holiday season told us anything, it’s that the trend between online advertising and social media has never been stronger. In fact, market research firm Zenith Optimedia has said that online advertising on a global basis is expected to be $121 billion in 2014, up 16% for the year.
This $121 billion will now represent 23% of total global advertising expenditures of $53 billion, which is a testament to the incredible force internet advertising has become. Zenith also expects online advertising to increase another 16% in 2015 and 2016, driven by the growth of mobile, which in itself is expected to be an even larger medium than radio advertising.
Twitter generates revenues through Advertising Services (89% of total revenues) and Data Licensing. Advertising Services include promoted tweets to targeted users, promoted accounts (which allow businesses to grow followers among groups that advertise their services) and promoted trends, which appear at the top of the list of trending topics each day.
When a user clicks a promoted trend, a promoted tweet created by the advertiser appears on the top of the search list. Data Licensing allows partners to access and analyze historical and real-time data on the Twitter platform.
And this platform is a big part of what makes TWTR so attractive. It had 284 million total users in the most recent quarter, up 23% from a year ago. More than 85% of these users reach Twitter through a mobile device. Twitter actually actually generates 75% of its advertising revenues from mobile.
Despite some of the criticisms surrounding TWTR stock’s financial performance, it is hard to argue against Twitter’s rapid growth. Revenues increased from $28.3 million in 2010 to $664.9 million in 2013, and Twitter’s impressive performance continued through the first nine months of 2014. In fact, TWTR earned its first net profit of 1 cent per share on an adjusted basis in the first quarter.
However, there were parts of Twitter’s third-quarter report that left the Street concerned. In particular, there are many questions about whether Twitter has a firm sense of direction yet for its next stage of growth after some recent shake-ups in Twitter’s upper management. Still, it’s important to note that the situation at TWTR is a dynamic one, and I expect we’ll see a much different company five years down the road as it continues to evolve.
TWTR stock pulled back into the end of 2014, breaking below technical resistance in December. However, TWTR shares have now stabilized following rumors that Twitter may merge with Yahoo! Inc. (YHOO) and that Carl Icahn has recently taken a stake in it.
The Yahoo rumor is certainly an interesting one. If YHOO’s interest in Alibaba Group Holding Ltd (BABA) could be spun off, we would be left with two very strong internet brands trading at reasonable valuations. However, the combination of these two underperforming companies could also raise some skepticism.
On the other hand, the rumor regarding Carl Icahn does make some sense, especially since he could use his vast influence to pressure TWTR’s management to finally make some changes to improve Twitter’s financial performance. Plus, his presence would give additional credibility to skeptical investors.
In the meantime, TWTR is investing big for the future by spending over half of its total sales so far in 2014 on research and development, and it must achieve a significant return on this investment if it is to succeed. If another quarter raises any more questions, I would not be surprised to see the current CEO ousted, which could actually serve as a strong catalyst for TWTR shares even if quarterly numbers disappoint.
No matter who leads Twitter, it has a tremendous platform for its users. Despite the results from the most recent quarter, Twitter’s platform continues to be an attractive one for users, which should enable TWTR to grow its user base and engagement and allow for strong revenue growth in the future.
With significant leverage in its business model, TWTR should see dramatic improvement in its profitability as its sales continue to rise.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10 and High Octane Trader.
