There is no doubt Twitter Inc (NYSE:TWTR) was a broken company and a broken stock leading up to the 2016 presidential election. However, it got a new sense of life as Republican candidate Donald Trump used the social media platform as a vehicle to express his message during the campaign – not to mention help make up for a major deficit in campaign funds versus his rival.
Trump’s use of Twitter has continued into his presidency, and the platform is now considered a top source of news whether it be from the commander in chief, another official or simply a media outlet. This newfound importance has benefited the company along the way, and we’re now even seeing signs that it is being “rediscovered” by younger users.
There is no question that the president has played some role in this, but I think the recent rise in TWTR’s share price has more to do with lowered expectations than anything. However, now that the stock has come back to life, we’re seeing some of those expectations shift:
- Earnings estimates for fiscal 2018 have increased from 46 cents a share a month ago to 58 cents
- Similarly, the consensus for 2019 has come up to 66 cents a share from 54 cents last month
Potential Comes Down to Management
I don’t think there is a debate as to whether this company has potential. Instead, the question is whether or not management can execute.
In the most recent quarter, monthly active users (MAU) came in at 330 million, up 4% driven by 262 million international MAU, also representing a gain of 4%. The U.S. saw 2% growth to 68 million MAU. This is where investors can be rewarded.
We also have to consider advertising revenue. International sales were up 18% to $302 million, and while the U.S. saw ad revenue decline 10% in the quarter, it still brought in $342 million. I think TWTR can leverage its international growth and exact greater pricing power, which in turn would justify higher share prices.
I like that management is getting a handle of the cost of business, but I did see a yellow flag as research and development (R&D) spending fell to $77.2 million from $104.2 million a year earlier.
It’s clear that the company has to find more ways to generate revenue from existing holdings in order to grow the business, but regardless Twitter remains a potential juggernaut. In fact, only Facebook (NASDAQ:FB) and YouTube have more MAUs at 2.1 billion and 1.5 billion, respectively.
I think TWTR has the potential to trade a lot higher, but I need to see more evidence of smarter execution and innovation before I start pounding the table here. In the meantime, as long as President Trump is tweeting, this will be a stock I’m keeping a close eye on.
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