Twitter Inc Stock Is a Sell at 52-Week Highs

TWTR stock deserves to trade below $16

By Luke Lango, InvestorPlace Contributor
Collect Your Gains and Get Out of Twitter Stock

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The Twitter Inc (NYSE:TWTR) bulls are back and TWTR stock is trading at its highest levels since October 2016.

When the stock exploded from $18 to $25 on rumors that Walt Disney Co (NYSE:DIS), Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL), and, inc. (NYSE:CRM) were interested in buying the social media company.

Takeover rumors aside, TWTR stock price is as high as it has been since late 2015. Why the sudden bullishness on a name that has been depressed for so long?

It all started with a big quarter wherein TWTR showed signs of operational improvement. Revenue growth, which has been negative for several quarters, is approaching an inflection point and will likely turn positive again next year. Margins are soaring higher. The company is on the verge of finally becoming profitable on a GAAP basis.

Moreover, Twitter ditched its long-standing 140-character Tweet limit in favor of a 280-character Tweet limit. According to management, users who take advantage of the 280-character Tweet limit receive more engagement, get more followers, and spend more time on the social media platform.

All in all, the Twitter growth story looks about as good as it has in a while.

But Twitter does not deserve to trade north of $20. That is far too big of a price tag for this struggling company.

Where should it trade? Below $16. Here’s why.

Twitter Isn’t the Same Company It Was Two Years Ago

Twitter is trading at its highest level since late 2015 (disregarding the takeover-inspired bounce in Oct. 2016). But Twitter had much more robust growth prospects at the end of 2015 than it does today.

Back then, revenues were growing around 50-60% year-over-year. Today, revenues are down 4-8% year-over-year.

Back then, the user base was growing at a high single-digit to low double-digit rate. Today, the user base is growing at a mid single-digit rate.

Granted, profit levels are higher now (adjusted EBITDA was almost 50% higher last quarter than where it was two years ago), but those higher profits have been driven by huge expense cutting.

Management said on last quarter’s earnings call that most of that expense cutting is in the rear-view mirror, implying that higher profits will be driven almost entirely by revenue growth going forward.

But revenue growth is negative. And if it does turn positive soon (which it should), growth won’t be big. Analysts are modeling for just 6% growth next year.

With expense-cutting in the rear-view mirror and muted top-line growth, TWTR’s growth prospects today are actually about as bleak as they’ve been in a while. This isn’t a 20-30% earnings growth story. Mid single-digit revenue growth on top of some margin expansion implies that this is just a 10% earnings growth story.

TWTR Stock Price Deserves to Be Below $16

The problem here is that Twitter isn’t priced as if it were a 10% earnings growth story (for what it is worth, the Street is also modeling for only 10% earnings growth over the next several years).

The S&P 500 is also expected to grow earnings around 10% per year over the next several years. The S&P 500 is trading at under 20x this year’s earnings. Shares of Twitter are trading at over 50x this year’s earnings.

That valuation discrepancy doesn’t make any sense.

Moreover, Facebook Inc (NASDAQ:FB) and Alphabet both trade around 32-33x this year’s earnings, 40% lower than TWTR’s 54x multiple.

But Facebook is expected to grow earnings at a 17% clip over the next several years (almost double Twitter’s expected growth), while Alphabet is expected to grow earnings at a 23% clip over the next several years (more than double Twitter’s expected growth).

In other words, both FB and GOOG have much larger growth prospects than TWTR, but trade at a 40% discount to TWTR.

That valuation discrepancy also doesn’t make any sense.

At the very best, TWTR deserves a 40x multiple. A 40x multiple on this year’s earnings implies a fair value of around $16. More realistically, Twitter deserves a valuation in line with FB and GOOG, so a 30x multiple. That gets you a $12 TWTR stock price.

Bottom Line on TWTR Stock

It is way, way overvalued above $20.

Twitter stock has failed to consistently trade above $20 since late 2015. I think this trend will remain intact. I expect TWTR stock to fall from here.

As of this writing, Luke Lango was long FB, GOOG, and DIS. 

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