Twitter (NYSE:TWTR) stock dropped big in late April after the company reported surprisingly bad first-quarter numbers.
Prior to Twitter reporting earnings, many other digital ad companies had reported strong earnings and issued favorable commentary on sales trends. Specifically, the general trend from other digital advertisers was that January and February were strong, March was weak, and April was a big recovery month, broadly implying that the “worst is over.”
Twitter was supposed to report something similar.
Instead, Twitter’s first-quarter numbers implied much weaker underlying trends. January and February weren’t that strong for Twitter. March was really weak. And there hasn’t been a recovery in sales in April.
In other words, the start was weak, and the worst still isn’t over. TWTR stock dropped about 10% in response to the subpar print.
Zooming out, I’d say that the stock is a sell for four important reasons, which were highlighted in the earnings report:
- Twitter’s ad business continues to flutter, and is arguably the weakest ad business in the social media arena.
- It will take a while for the company’s revenue growth trajectory to rebound.
- Expense growth is set to meaningfully outpace revenue growth for the foreseeable future, putting huge downward pressure on profit margins.
- TWTR stock remains one of the most richly valued stocks in the digital advertising space.
Ad Business Struggles
Twitter’s ad business has forever been the eyesore in a booming digital ad market. That is, while the digital ad market has grown revenues at a 10%-plus compounded annual growth rate over the past three years, Twitter has grown revenues at a 6% clip over that same stretch.
Subpar ad growth continued for Twitter in the first quarter and into April.
Twitter ad revenues dropped 27% year over year in the last month of March. That’s a steeper decline than what we heard over at Pinterest (NYSE:PINS) and Snap (NYSE:SNAP). The math there implies that revenues were only rising at a rate that was approximately 7.5% prior to the slowdown, also weaker than what we heard over at Pinterest, Snap and Facebook (NASDAQ:FB). Worse yet, April revenues are trending at similar levels to March, or down nearly 30% year over year.
Facebook said that its revenue growth rate in April has been flat. Snap said it was seeing positive revenue growth in April.
In other words, Twitter — which has long had the weakest digital ad business in social media — continues to report weaker-than-peer numbers amid this crisis.
A Rebound Will Take Time
Because Twitter’s revenues are down more than 20% year over year in April, a rebound in Twitter’s growth trajectory will take time to materialize.
The huge decline in April ad revenues for Twitter — despite flat to slightly up numbers for peers — implies that Twitter is at the bottom of the totem pole when it comes to marketers’ social media ad budgets. That positions the platform to be among one of the last to win back ad dollars amid the economic recovery over the next few months.
That is, while advertisers will likely pour more money back into Facebook and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) over the next few months as the economy starts to re-open, they will likely wait longer before committing more ad dollars to Twitter.
The big implication, of course, is that the rebound at other digital advertising companies could materialize much more quickly than a rebound at Twitter. It could take until the third or fourth quarters before Twitter’s numbers start to perk up again.
Margins Will Get Slashed
Twitter’s profit margins are under tremendous pressure, and will remain under tremendous pressure, likely for the rest of the year.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins dropped more than 10 percentage points year over year in the first quarter, as expenses (excluding D&A) rose more than 20% on sub-3% revenue growth. Perhaps the worse news is that expenses are expected to rise in the low-teens in the second quarter, while revenues are dropping by more than 20% year-over-year.
It’s unlikely Twitter regains 10%-plus revenue growth in any quarter this year. If so, then the company is looking at a Q2, Q3 and Q4 with 10%-plus expense growth and sub-10% revenue growth, implying multiple consecutive quarters of meaningful margin compression.
That will put huge pressure on profits, and likely keep TWTR stock from flying higher.
The Stock Is Richly Valued
Despite the company’s headwinds, TWTR stock remains one of the most richly valued names in the social media space.
Looking out to 2025 earnings per Seeking Alpha, Twitter stock trades at 19-times 2025 consensus earnings estimates. For comparison purposes, the 2025 consensus earnings multiples for Facebook stock (13), Snap stock (11) and Alphabet stock (12) are all roughly 30% or more lower than Twitter’s 2025 earnings multiple.
The huge premium is not warranted by the fundamentals. Twitter is the slowest grower in the group. The platform has the lowest number of daily users in the group. Margins are subpar and falling.
In other words, Twitter’s stock is richly valued, and it shouldn’t be.
Bottom Line on TWTR Stock
All digital ad stocks are not equal. Twitter’s earnings confirmed as much. Unfortunately, at the current moment, Twitter is delivering subpar advertising performance. I expect this to persist for at least the next few months. So long as it does, TWTR stock will under-perform its peers.
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 PINS, SNAP and FB.
