Twitter (NYSE:TWTR) has been falling since it reported earnings in late July. Like some of the other social media companies, Twitter stock is dealing with new privacy laws in Europe and additional scrutiny here in the States.
When TWTR reported earnings back in July, the company beat both its earnings-per-share estimate and the revenue estimate. The problem for TWTR stock was the decline in monthly active users. The decline was attributed to changes by the European Union. The General Data Protection Regulation (GDPR) is a regulation from the E.U. on data protection and privacy and it went in to effect in May.
Twitter has also faced scrutiny from President Trump. He accused the company of “shadow banning” Republicans. Shadow banning is a practice of limiting the visibility of a Twitter user in the platform’s auto-populated search box. Twitter denied the allegations.
Between these factors, Twitter’s stock price has fallen over 40% since the beginning of July. Twitter stock is oversold based on the weekly stochastic readings and the 10-week RSI is at its lowest level since April 2017 — back when the stock was trading under $15 a share.
There could be a support level coming in to play at the $26.60 area. That area marked the low back in April before TWTR stock jumped up to the $47.50 level.
It actually looks like the pattern could be developing in to a head and shoulders pattern, but it is too soon to tell. The high in March would be the left shoulder, the low in April would be the left side of the neck, and the high in June/July would be the head. If the $26.60 area holds as support, the next step would be for the formation of the right shoulder up around the $36-$37 area.
Twitter Stock’s Fundamentals Are Still Strong
Even with the slide in Twitter stock, the fundamentals are still really strong. The company saw earnings grow by 113% in the second quarter and analysts expect the company to grow earnings by 59% for 2018 as a whole.
Sales have grown at a rate of 10% per year over the last three years and they grew by 24% last quarter. Analysts expect third-quarter sales to show an increase of 19% over last year.
The profit margin for TWTR is at 21.4% and its operating margin is at 10.7%. Those numbers could be higher, but at this point, the company is still in the growth phase and those numbers are more acceptable as a result.
Twitter will report earnings again in a couple of weeks and it will likely face similar scrutiny this time around. If the active monthly user data declines again in the third quarter, Twitter stock could drop further. However, with this being the second quarter where the new rules in Europe have been in place, the expectations have been ratcheted down a little.
The sentiment indicators haven’t changed much since July. The short interest ratio is at 2.36 and it was at 1.67 back in July. There are 36 analysts following TWTR stock and there are only four “buy” ratings on the stock. There are 21 “hold” ratings and 11 “sell” ratings. Those numbers haven’t changed a bit since the July earnings report.
I am especially surprised by the analysts’ ratings. If Twitter can continue to grow its earnings and sales, I look for some of those analysts to shift to a more bullish stance on the Twitter stock price. And when analysts upgrade stocks, it tends to spur some buying pressure.
If the $26.60 level holds, I look for TWTR stock to rally at least up to the $36 level and that is a pretty solid gain. If the earnings report is as good as the last one and the monthly user data is in-line with expectations or better than expectations, we could see a sharp rally.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.