As I mentioned in an article a little over a month ago, I’ve always been a fan of Twitter Inc (NYSE:TWTR). I avoided investing in Twitter through its wild initial public offering and much of the next year as I waited for it to settle down.
I liked how things were shaping up for Twitter as we ended 2014 and began 2015, and TWTR stock looked like a good “buy” ahead of its fourth-quarter earnings report.
The story played out as I expected. Twitter reported strong earnings after the close on Feb. 5, and in my GameChangers service we made a nice 20% in just two months.
While earnings were indeed strong, there were enough yellow flags to make me cautious for the moment. So, while I continue to like Twitter and may very well recommend it again someday, we took our profits and have moved on to other opportunities.
TWTR – Caution Flags
Twitter posted impressive beats on both the top and bottom lines. Revenues of $479 million doubled from a year ago and were well above the $453 million consensus; earnings of 12 cents a share were double expectations. Those numbers were good enough to send TWTR stock soaring 16% the next day.
Digging a little deeper, there are a few areas that concern me enough that I wouldn’t buy Twitter stock right now:
User growth: The number of regular users in the quarter increased just 1.4% from 284 million to 288 million. That was well below the Street’s expectations for 291 million and not on par with Twitter’s previous quarters. On the conference call, CEO Dick Costolo said that monthly user growth increased throughout January, but I do not believe the Street will forget about the lack of growth in the fourth quarter so easily.
Lots of stock compensation: I was also concerned by the large amount of stock compensation — which is excluded in pro-forma results. In fact, EBITDA (earnings before interest, taxes, depreciation and amortization) projections for 2015 are $550 – $575 million, but stock-based compensation excited that by nearly $200 million, projected to be $700 – $750 million.
Sector valuations: We have seen Facebook Inc’s (NASDAQ:FB) valuation start to recede a little, and I would not be at all surprised to see TWTR’s valuation gains limited. Facebook currently sells at 30 times 2016 earnings, and TWTR is double that at 60 times 2016 estimates of 75 cents per share.
External factors: Twitter’s bread and butter, of course, is advertising. Advertising is a cyclical business, and if some of the international concerns cause the global economy to start to weaken, there is a strong chance that social media stocks will see their growth slow.
There’s no denying the game-changing nature of Twitter, and I remain very interested in what’s to come from Twitter. I wouldn’t be at all surprised to recommend TWTR again someday. For now, however, I’m watching and focusing on other opportunities with fewer yellow flags.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10 and High Octane Trader.
