For a while, things were looking pretty dour for social media company Twitter (NYSE:TWTR). There were murmurs of a digital advertising industry collapse, partly due to slowing digital ad growth rates and partly due to regulatory concerns. Also, there were murmurs of peak social media, as user bases across most social platforms started flattening out or falling back recently. As of result of those murmurs, Twitter stock found itself at $27.50, more than 40% off its 52 week high, going into Q3 earnings.

But, Q3 earnings were quite good. Revenues topped expectations. So did profits. Digital-ad growth rates remained robust, and daily engagement growth rates remained healthy. Twitter stock rallied more than 15% in response.

In other words, against the backdrop of severely depressed social media stock sentiment, Twitter reported blowout Q3 numbers which confirm that the digital ad growth narrative isn’t dead yet. By the looks of it, this growth narrative won’t be dead for a long time, and that means this big post-earnings rally in Twitter stock is warranted.

But, even as a digital-ad bull and former Twitter stock bull, I don’t think there is much upside left in the near to medium terms. Over the past several months, I’ve maintained $30 as the critical level for Twitter stock. Below it, the stock looked attractive. Above it, the stock looked maxed out.

As of this writing, Twitter stock trades at $32. I think those levels are close to maxed out for Twitter stock. As such, I think now is a good time to do some profit taking.

Twitter’s Quarter Affirmed Secular Growth Trends

Across the board, Twitter’s Q3 report was very good and affirmed that the secular growth trends supporting the digital ad industry remain robust.

Twitter’s monthly active user base fell back 1% year-over-year and 2% quarter-over-quarter to 326 million. This marks the second consecutive quarter of MAU declines. Ostensibly, this is no good. But, the drops are the result of fake account vetting, and from this perspective, MAU drops are healthy. Although Twitter now has less overall MAUs, the MAU base today is presumably more valuable as a whole because more of the accounts are real, and real accounts are worth more than fake accounts. Thus, slight MAU drops aren’t a big deal, so long as daily engagement remains strong.

It does. DAUs rose 9% in the quarter, consistent with recent DAU growth trends. Thus, while Twitter is deleting fake accounts and that is shrinking the overall MAU base, real users are interacting with the platform more than ever, and that is a healthy sign for financials.

It should be no surprise, then, that despite a drop in MAUs, Twitter’s revenue growth accelerated in Q3, continuing what has been a multi-quarter trend in revenue growth acceleration. In the first quarter of 2017, revenue growth bottomed at an 11% decline. By the end of 2017, revenue growth had inflected into positive territory with an up 1% rate. Now, in 2018, revenue growth has accelerated from 21% to 23% to 29% in Q3.

Robust revenue growth despite MAU compression has been driven by one thing: each user on Twitter becoming more valuable due to higher engagement. ARPU in the year ago quarter was $1.79. This past quarter, it was $2.33, up 30% year-over-year.

This is a great thing. Twitter currently finds itself in a state where unit revenues are going up by a lot more than unit costs, and as a result, margins are ramping higher. Adjusted EBITDA margins rose 2 points quarter-over-quarter and 4 points year-over-year in Q3 to 39%. Robust margin expansion drove yet another GAAP profitable quarter for Twitter, marking the company’s fourth consecutive GAAP profitable quarter.

Overall, Twitter’s quarter was strong, and underscored that the digital ad secular growth narrative remains robust. So long as this narrative remains robust, Twitter stock deserves a premium valuation.

Twitter Stock Looks Fully Valued After The Pop

Q3 numbers affirmed the secular growth thesis for Twitter stock. Unfortunately, that secular growth thesis doesn’t support Twitter stock at levels about $35 just yet.

This is a company which is clearly maxed out on user growth. Given fake account vetting and global user saturation, Twitter will be lucky to stabilize the MAU base around 330 million over the next several years. All the growth will come from ARPU increases. ARPU last year was just $7.50, and that is pretty low for this industry. Reasonably speaking, that should be able to grow to $10 to $15 within the next five years as more and more ad dollars flow into the digital channel.

Assuming the user base remains stable and ARPU ramps to ~$13 in five years, I think Twitter can do about $4.3 billion in revenues in five years. This seems very reasonable. Last year, Twitter took home roughly 1% of the $230 billion global digital ad market. The global digital ad market is expected to hit $430 billion in five years. Thus, at $4.3 billion in revenues, that implies 1% market share for Twitter.

In other words, Twitter simply needs to defend and maintain global-digital-ad market share over the next five years in order to get to $4.3 billion in revenues. That seems reasonable.

Meanwhile, because all of the revenue growth will come from ARPU increases, margins should head higher during the next five years, too. This healthy margin expansion should allow Twitter to turn $4.3 billion in revenues into $1.75 or more in EPS in five years. Throw a digital ad average 25X forward multiple on that, and discount back by 10% per year. You arrive at a 2018 price target of roughly $33.

Thus, at $32, Twitter stock seems fully valued under reasonable growth assumptions.

Bottom Line on TWTR Stock

Twitter stock was a screaming buy as it fell sharply below $30. But, after this big pop, the stock now looks fully valued. Further gains in the near to medium term will likely be challenged by valuation friction.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.