Within this unprecedented crisis, most industries are clear losers, though a select few names have enjoyed upside moves. However, social media falls into a unique middle ground. On one hand, companies like Twitter (NYSE:TWTR) have suddenly become even more relevant, offering vital news from the ground, often in real time. But translating this user base into revenue has always been a challenge. That challenge will become even more pronounced, which is why Twitter stock has ebbed and flowed heading into the company’s first-quarter earnings report.
In any other circumstance, a rise in user numbers and engagement would be enough to justify taking a risk. After all, social media-like dating is a numbers game: go through enough rejections and chances are, you’ll eventually hit upon a yes. But for Twitter stock, mere attraction doesn’t cut it. You can have all the views in the world, but if it doesn’t translate to revenue growth, TWTR is dead in the water.
If that wasn’t bad enough, management withdrew its revenue and profit forecast for Q1 late last month. At the time, the leadership team expressed concerns that the novel coronavirus would negatively impact advertiser demand. Now, those fears are coming to life in the worst manner possible.
Prior to the pandemic, eMarketer expected the digital ad market to exceed $150 billion, with retail representing the top spending category. Other forecasted big spenders included airliners and entertainment. If you look at the share price performance of United Airlines (NASDAQ:UAL) or Cinemark (NYSE:CNK), you can tell that 2020 will probably not match prior expectations.
However, social media rival Snap (NYSE:SNAP) pulled off an impressive Q1 earnings report. Is there hope for Twitter stock?
A Critical Test Ahead for Twitter Stock
On paper, analysts are expecting consensus earnings per share of 10 cents. Individually, estimates range from a penny to 15 cents. In the year-ago quarter, Twitter delivered EPS of 37 cents, beating out the 15-cent consensus target.
For revenue, analysts are forecasting $788.9 million, with individual estimates ranging between $668.9 million to $882.7 million. In Q1 2019, the social media firm generated sales of $787 million.
A major reason why Snap jumped higher following its Q1 report was its massive revenue growth, which was up more than 44% year-over-year. Additionally, global daily active users were up 20% from the same period last year to 229 million. If Twitter stock is to replicate that enthusiasm, the underlying company must bring home similar metrics.
Understandably, this will be a huge challenge. It’s no secret that when times get tough, many businesses reduce their ad spend and/or lay off their marketing team. As I implied earlier, investors shouldn’t expect retailers and airliners to jump right back when the economy reopens.
Because this is a health-related crisis, most folks are simply unwilling to venture outside unnecessarily. According to a Reuters report, 72% of American adults support shelter-in-place initiatives until medical experts give the okay.
However, one substantial tailwind for Twitter stock is the massive surge toward digital platforms. For instance, Netflix (NASDAQ:NFLX) shares shot up due to people forcibly staying at home.
And in this digitalized economy, businesses can’t afford to not advertise. For astute, savvy entrepreneurs, the coronavirus is an opportunity of a lifetime. As an example, personal protective equipment was never high among most consumers’ priority list. Now, these products represent some of the hottest commodities.
I think most businesses recognize this, which is why you don’t want to get too negative on Twitter stock.
Take the Moderate Approach
Of course, earnings season always has an element of volatility and risk. With the Covid-19 pandemic, this has never been truer. Thus, the optimistic viewpoint for TWTR is not unreasonable, but you don’t want to expose yourself too much.
There’s no question that for many retailers and the entire travel industry, advertising will largely be a non-productive expenditure. In my opinion, the health concerns will take a long time for society to get over.
On the other hand, businesses can’t afford not to spend on advertising initiatives. If any organization wanted to make an impact, this will be the time to do it. Everyone is at home and they’re arguably more receptive to new ideas and concepts.
Therefore, if you’re bullish on Twitter stock, I’d take a small position as a “just in case” acquisition. But I’d really like to see the Q1 numbers before getting too involved.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
