If You Missed Twitter Stock on the Way Up, Grab It as It Bottoms Out

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Twitter stock - If You Missed Twitter Stock on the Way Up, Grab It as It Bottoms Out

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Shares of digital advertising company Twitter (NYSE:TWTR) have been on a roller coaster ride over the past several years. First, Twitter stock started off Wall Street life with a big IPO that didn’t quite deliver on supercharged expectations.

Then, things took a turn for the worse, as user growth slowed, revenue growth dropped into negative territory, losses continued to pile up, and Twitter stock quickly became the ugly duckling in an otherwise very strong digital advertising industry.

Those struggles were just a phase. Over the past few quarters, while user growth trends have remained weak, revenue growth trends have dramatically improved thanks largely to video ad integration. Improved revenue growth trends drove Twitter into consistently profitable territory, and Twitter stock took off to new highs.

Those new highs were also just a phase. As user growth trends have remained weak and broad digital advertising concerns have grown, Twitter stock has struggled. Shares have dropped 30% off their highs over the past 6 months.

What’s next in this wild roller coaster ride for Twitter stock? It all depends on price. At this point, Twitter has proven its staying power in the social media and digital advertising landscapes. But, those landscapes are less green than they were a year ago, and the long term earnings growth outlook for Twitter, while good, isn’t great. 

All together, it’s tough to justify prices above $35 for Twitter stock, especially amid recent stock market turmoil. But, below $30, the upside in Twitter stock looks compelling. 

Twitter Has Solid Fundamentals

The fundamentals underlying Twitter stock are solid, but nothing too exciting.

User growth is a big headwind. This platform seemingly hasn’t grown its user base for the past several years. Now, due to huge fake account purges, the monthly active user base is in decline. Long term, 300 million monthly actives seems like a reasonable carrying capacity for the platform.

That is still 300 million users, which is a lot. And, those 300 million users are more engaged than ever with daily usage consistently growing around 10% year-over-year. With usage up and more videos being shared, Twitter is having an easier time monetizing its 300 million users. Net result? Revenue growth trends are dramatically improving, even with stalled out user growth.

The big positive here is that ARPU and operating margins at Twitter remain well below where they are at Facebook. For all intents and purposes, at scale, these two businesses should operate at similar ARPU and margins. Thus, as Twitter’s ARPU and margins scale going forward, Twitter stock should be supported by solid growth fundamentals. 

Broad Concerns Remain

Although the fundamentals are solid, there are many things not to like about Twitter stock. Most of those things relate to headwinds regarding the entire digital advertising industry.

For starters, the digital advertising industry is slowing. This used to be a 20%-plus growth industry over the past several years. But, a big chunk of ad dollars have already migrated to the digital channel. Consequently, global digital ad growth is expected to slow meaningfully over the next several years, and will likely end up up below 10% within the next five years.

Moreover, growth could be further hampered by regulation. Ever since Facebook’s (NASDAQ:FB) Cambridge Analytica scandal, social media giants have been under intense public and political scrutiny for the way they use personal data to generate millions and billions of dollars in profits. If this scrutiny turns into political action, growth across this whole industry will slow. 

Lastly, this bull market seems to be on its last legs. That is the consensus among many investors and analysts. We may not be due for a big correction. But, global economic growth going forward is anything but certain, and investors are pricing in that increased uncertainty. That means growth stocks like Twitter will continue to be weak so long as this thesis remains the market consensus. 

Below $30 Seems Like the Right Price

Given solid fundamentals mixed with some industry headwinds, Twitter stock isn’t a “buy now and hold forever” stock. It is a “buy when the price is right” stock.

Below $30, the price is right.

Assuming user base stabilization, healthy ARPU growth, and continued margin expansion, Twitter should be able to do about $1.75 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.

Bottom Line on TWTR Stock

Given secular headwinds facing the digital ad industry and threats to the global economic growth narrative, Twitter stock isn’t a “buy now and hold forever” type of stock.

But, given solid fundamentals which support healthy long term earnings growth, this is a stock you want to buy when the price is right.

The price is right below $30. As such, Twitter stock looks compelling on dips below $30.

As of this writing, Luke Lango was long FB.


Article printed from InvestorPlace Media, https://investorplace.com/2018/11/twitter-stock-on-the-way-up/.

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