Twitter (NYSE:TWTR) stock is down nearly 3% in the last month after the company reported mixed fourth-quarter results. But while Twitter certainly has some hurdles to clear in 2019, the bull case on Twitter stock is very much alive and well.
Earnings Disappointments
There’s no question there were things not to like about Twitter’s Q4. Twitter’s monthly active user count dropped 2.7% during the quarter compared to a year earlier and 1.5% compared to Q3. Those numbers look even worse when compared to rival Facebook (NASDAQ: FB), whose MAUs surged 9% in Q4.
TWTR also made the controversial decision to no longer report total MAUs moving forward. Instead, Twitter will be reporting only monetizable daily active users, or mDAUs. According to Twitter, mDAUs are users who access Twitter through an app or web browser that is able to show ads. The market is rarely pleased when a company stops disclosing information such as MAUs, and Twitter stock was no exception to that rule.
Finally, Twitter’s updated Q1 guidance suggests its margins could decline by 8% compared to a year earlier.
To make matters worse, TWTR has spent most of the past two years dealing with blowback from the role the platform played in the 2016 U.S. presidential election. Last year, Twitter invested heavily in cleaning up its content and enforcing its terms of service, deleting millions of fake and/or abusive accounts.
Like Facebook, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and all the other major internet companies, Twitter has come under a lot of pressure to beef up its regulations on data protection and online privacy. New regulations can create uncertainty for investors and make life difficult for a company like Twitter, which relies on user data to promote its advertising business.
Things Aren’t as Bad as They Look
From an operational standpoint, Twitter’s Q4 wasn’t as bad as it may have looked at first glance. First of all, the “big two” metrics — earnings per share and revenue –were both well above analysts’ consensus estimates, while Twitter’s revenue jumped 24% from a year ago.
While Twitter’s MAUs were down, its mDAUs were up 9.5% YoY. Skeptics may grumble about Twitter changing the rules of the game by switching from reporting MAUs to mDAUs. However, assuming that mDAUs actually represent what the company says they do, mDAUs matter much more than MAUs.
Twitter’s average revenue per user in 2018 was about $9.48, up from around $7.50 in 2017.
Sure, it would be great if Twitter were still adding 15 million new users each quarter like it was back in 2013. But the company can clearly still grow its revenue by better monetizing its current user base. The latest numbers suggest it is doing just that.
Twitter’s Q1 margin guidance was likely disappointing to the market and to the owners of Twitter stock. But one thing Twitter management did not do is change its long-term margin guidance. In other words, the potential margin dip may simply be a short-term bump in the road.
Twitter Stock Has Hidden Value
Twitter historically struggled to monetize its user base, especially compared to Facebook. However, after TWTR steadily improved its ad business for years, TWTR stock has become an under-the-radar value play. Twitter stock currently has a price-earnings ratio of 20.1. That number is certainly not bad for a company that grew its revenue by 24% and reported that its non-GAAP net income jumped by an impressive 73% YoY in Q4.
On top of those numbers, Twitter has produced $1.34 billion of cash from its operations over the past four quarters, and it’s generated $856 million of free cash flow during that period. That free cash flow was up YoY, even though its capital expenditures jumped 73%.
But perhaps Twitter’s biggest asset isn’t as easily quantified. Specifically, Twitter’s true long-term value may rest in the fact that there’s nothing else like it in the world. As Citron’s Andrew Left pointed out last year, most of the important news in sports, politics and finance broke on Twitter in 2018.
“Twitter has never been more relevant than now, and money follows relevancy,” Left said at the time.
Left later called Twitter the “Harvey Weinstein of social media,” but I think his take on Twitter’s valuable position as the top platform for real-time news dissemination is more relevant.
Bottom Line on Twitter Stock
Twitter stock is one of the core investments positioned to benefit from continued growth trends in mobile-internet usage and streaming video. Those two trends should be among the biggest digital trends in tech for years to come.
The potential size of the mobile and streaming internet markets are so large that Twitter doesn’t even have to match or beat Facebook’s market share — it just needs to get enough of the social-media pie to continue to develop its niche business.
As of this writing, Wayne Duggan held no positions in the aforementioned securities.
