Shares of Twitter (NYSE:TWTR) popped in mid-April after the social media giant reported first quarter numbers that blew estimates out of the water. Of critical importance, Twitter broadly reported its best user growth in two years, after back-to-back quarters in the back half of 2018 which comprised user declines. Investors celebrated the positive inflection in user growth trajectory, and Twitter stock popped 15% to fresh 2019 highs.

I’ve been ringing the bull horn on TWTR stock for the past several months, and actually said earlier this year that calendar 2019 could be a great year for the stock. Fast forward four months: Twitter stock has rallied 40% year-to-date, and 50% from its late 2018 lows. That’s a big rally, and it’s happened rather quickly. Almost too quickly.

As such, while I still like the company long term, I think TWTR stock needs to take a breather here. After this latest earnings pop, the stock is now rubbing up against some valuation and technical friction which may limit further upside in the near term. That’s why I’m doing some profit taking here, but will look to re-enter on any substantial dips back into the mid-$30’s.

Great Quarter Underscores Long-Term Bull Thesis

In a nutshell, Twitter’s Q1 numbers were loved by Wall Street because they broadly confirmed this company’s long-term bull thesis, which is that Twitter is an irreplaceable and still very important part of the consumer digital ecosystem. The political scene, too; the decline in Trump Twitter followers notwithstanding.

This thesis was under fire in late 2018. Twitter had reported back-to-back quarters of declines in the monthly active user base, while daily active user growth slipped to 1% quarter-over-quarter by the end of 2018. Investors were starting to question the staying power of Twitter in a rapidly evolving consumer digital ecosystem with heavy usage overlap between the big platforms, like Twitter, Facebook (NASDAQ:FB) unit Instagram and Snap (NYSE:SNAP).

But, in the first quarter, Twitter made several improvements to its platform. Most importantly, management made Twitter much more visual-friendly by introducing the Twitter camera. That aligned the platform with this up-and-coming Stories and visual-first trend. Also, Twitter continued to aggressively vet malicious and spam content, and cleaned up the feeds.

The improvements worked. Twitter’s user growth trajectory improved meaningfully in the first quarter. The monthly active user base started growing again, posting its first sequential gain since Q1 2018 and the biggest sequential gain since Q1 2017. The daily active user base also posted its biggest sequential gain since then, too.

Broadly speaking, then, Twitter’s user growth turnaround in the first quarter amid multiple product improvements underscores that Twitter has staying power and relevancy in the consumer digital ecosystem. That’s big for TWTR stock.

Further Twitter Stock Upside Seems Limited

Although strong Q1 numbers underscored the long-term bull thesis, further upside in Twitter stock seems limited because all the good news is already priced in.

Over the past several years, Twitter has controlled roughly 1% of global digital ad revenues. Although user growth trends improved this quarter, Twitter’s user base has been largely stuck in neutral for several years, and barring some huge change to the platform, it seems likely that the user base will remain largely stable for the foreseeable future. As such, it seems reasonable to project that Twitter will continue to control roughly 1% of the digital ad market over the next several years.

The global ad market is projected at roughly $850 billion by 2023. I think that number hits $1 trillion by 2025. Meanwhile, digital ad penetration is projected at narrowly over 60% by 2023. I think that number hits 65% by 2025. Under those assumptions, the digital ad market should measure around $650 billion by 2025. A 1% share of that would imply roughly $6.5 billion in 2025 revenues for Twitter. That represents an 11-12% compounded annual growth rate for revenues from 2018 to 2025, which is roughly in-line with the company’s second quarter guide for revenue growth.

Over the next several years, margins should continue to improve. But, at a lesser rate of expansion, given that adjusted EBITDA margins are already pushing up toward 40%.

Assuming low double-digit revenue growth and some margin expansion over the next several years, I peg Twitter’s profits as hitting roughly $2.50 per share by 2025. A digital ad average 25x forward multiple on that implies a fiscal 2024 price target of more than $60 for Twitter stock. Discounted back by 10% per year, that equates to a fiscal 2019 price target of just under $40. That’s roughly where TWTR stock trades today.

Bottom Line on TWTR Stock

Twitter stock was a great buy in early 2019 when the cards were down. But, now that the stock is in full rally mode and has gained 50% over the past few months, the time to buy has already come and gone. Valuation friction will likely limit further near- to medium-term upside in TWTR stock.

As of this writing, Luke Lango was long FB.