Wait for Twitter Stock to Drop Below $20 Before Buying the Dip

Relative to other digital ad stocks, TWTR stock is still pretty expensive

Alongside the rest of the digital advertising world, shares of Twitter (NYSE:TWTR) have fallen off a cliff since mid-February as the coronavirus pandemic has brought the global economy to a screeching halt. TWTR stock has lost about 40% of its value since Feb. 20.

Wait for Twitter Stock to Drop Below $20 Before Buying the Dip
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It’s tempting to want to buy the dip in Twitter stock.

After all, the coronavirus pandemic won’t last forever. Once it does pass, consumer spending will bounce back. So will ad spending. And all those ad dollars will flow more aggressively than ever into the digital channel, because that’s where all the engagement is today (pretty much every social media platform has reported record engagement during the quarantine).

Big picture, then, Twitter will be just fine long term. The user base is sticky and will keep growing thanks to increased digital engagement. Revenues will keep marching higher on the back of a secular shift towards digital advertising. Margins will expand gradually with scale. Profits will move higher.

That all makes sense to me. But, there’s one big problem: valuation.

Pretty much every other digital ad stock is trading at a huge discount to fair value. Twitter stock isn’t … yet. So, while I like the rebound thesis on Twitter, I’d wait to buy until the stock drops below $20.

Twitter Will Be Fine Long Term

Over the long term, Twitter will survive the coronavirus and come out the other side a strong, profitable, healthily growing company.

Zooming out, you have to understand this is not the first pandemic the world has ever seen, nor the first recession, nor the first stock market crash. The world has seen all that and plenty more. And, through all of those disasters and tragedies, the advertising industry never died.

It won’t die this time.

Regardless if it’s a few months or a few quarters, the coronavirus pandemic will pass. When it does, the economy will normalize. Consumers will get back to spending. Marketers will get back to advertising.

Twitter is well-positioned to win over a lot of those ad dollars because it is a huge social media platform with wide reach and high engagement. The company will maintain ~1% share in the global digital ad market, leading to steady ~10% revenue growth over the next several years. Profit margins will improve with scale. Profits will run higher on the back of ~10% revenue growth and gradual margin expansion.

Net net, Twitter will exit the coronavirus crisis looking much like it did coming into the crisis: a ~10% revenue grower with ~15% profit growth potential.

Not Cheap, Yet

The problem with Twitter stock, however, is that shares simply aren’t cheap enough yet, considering the huge near-term operational risks.

The digital ad industry is going to get whacked in the second quarter of 2020. It will probably be the worst quarter for digital advertising, ever. Many see this 20%-plus growth industry, doing -20% revenue growth in the second quarter. It’s going to be that bad.

To account for this huge downside risk in Q2 — and potential of weakness dragging into Q3 — digital ad stocks have dropped to dirt cheap levels.

Facebook (NASDAQ:FB) is trading at 9.6x 2024 earnings estimates (note: I’m using long-term earnings estimates here to account for growth). Snap (NYSE:SNAP) is trading at 10.2x 2024 earnings estimates. Pinterest (NYSE:PINS) is trading at 11.1x 2024 earnings estimates.

Twitter, meanwhile, is trading at 18.4x 2024 earnings estimates. That’s high — too high.

So, I’m not in any rush to buy the dip in TWTR stock. Several other digital ad stocks look very compelling amid recent weakness. Twitter stock does not.

Bottom Line on TWTR Stock

Twitter will rebound from the coronavirus crisis. But, relative to peer digital ad stocks, TWTR stock simply isn’t that attractively valued relative to its long-term profit growth potential.

As such, while I’m looking to buy the dip in digital ad stocks here, I’m holding off on pulling the trigger on TWTR stock. I’d like to see shares drop below $20 before I’m comfortable with the valuation.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long FB, SNAP, and PINS. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/04/wait-for-twtr-stock-to-drop-below-20-before-buying-the-dip/.

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