So far, 2016 has been tough for Twitter Inc (TWTR), with shares off 20% for the year-to-date. However, there are signs of hope, as Twitter stock has staged a nice rally of more than 30% since its February lows.
So is there more room on the upside? Or should investors still be skeptical of Twitter stock?
Interestingly enough, it still appears that the valuation is, well, pricey. This is the assessment of Bernstein analyst Carlos Kirjner, who has done intensive number crunching on the metrics for Twitter stock.
Consider that his focus has been mainly on something that often gets ignored: the impact of stock-based compensation.
Now it’s true that this is important for any tech company that needs to attract top-notch talent. Hey, it’s extremely challenging to compete against juggernauts like Facebook Inc (FB) and Alphabet Inc (GOOG, GOOGL) as well as the many hot startups, such as Snapchat.
But as with anything, there still needs to be discipline with stock-based compensation. If not, a stock could really be more expensive when using non-GAAP measures like EBITDA. And according to Kirjner, this appears to be the case with TWTR stock.
So let’s take a deeper look. In his analysis, Kirjner looks at the following companies — Facebook, Alibaba Group Holding Ltd (BABA), Yahoo! Inc. (YHOO), Alphabet, eBay Inc (EBAY), Netflix, Inc. (NFLX) and Amazon.com, Inc. (AMZN) — and has the following conclusions:
- TWTR spends the most on stock-based compensation as a percentage of revenues (30.8%), with the next company, BABA, at 17.1%.
- TWTR spends the most on stock-based compensation as a percentage of Non-GAAP net income (247%), with the next company, Amazon, at 91%.
Yes, for the most part, TWTR really looks like an outlier — and this should be concerning for shareholders.
To put things into perspective, Kirjner applied the impact of the share-based compensation in his valuation analysis. The result? Well, he would not recommend buying TWTR stock unless it was about $12 to $14 a share.
Bottom Line on Twitter Stock
The analysis from Kirjner may actually be too optimistic, as he has assumed there will be steady user growth during the next nine years, reaching about 460 million monthly active users.
Unfortunately, the fact is that TWTR has stalled. In the latest quarter, there was actually no growth, with MAUs stuck at 320 million. That didn’t even meet the low-growth estimates of analysts, who were forecasting about 324 million.
If user growth cannot improve, then there will inevitably be deceleration in revenues — and that’s already happening. For Q1, TWTR expects revenues of $595 million to $610 million. Even at the high end, that would represent 40% year-over-year revenue growth. And while that sound robust, that’s down from 48% growth in Q4 2015, 57% growth in Q3, 60% growth in Q2 and 74% in last year’s Q1.
And let’s face it: Advertisers want to place their bets on platforms that provide more scale, such as FB or Snapchat.
So all in all, it’s tough to get excited about Twitter stock, except for the occasional buyout rumor. What’s more, if the deterioration continues, an acquisition may not mean much either, since TWTR might be less likely to get a premium valuation if it can’t get back into gear.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
