Washington may have Twitter (NYSE:TWTR) and its rivals in its crosshairs. But, while it makes for great headlines, it does little to change the bull case for Twitter stock. Why? These political headwinds, as well as other factors weighing shares down, may soon be in the rearview mirror.
As this happens, expect shares to climb back above the $50 per share price level. And beyond. How so?
First, the political issues may be making news yet again. But, in the coming years, this may be less of a factor. Namely due to the prospect of Twitter better policing its platform. This not only could get Congress off its back. With a less toxic platform, it may be able to improve its reputation among advertisers.
Second, issues over its financial performance may be in the rearview mirror as well. As seen from its recent earnings release, the company is handily beating expectations. The novel coronavirus’ negative impact on the ad market is starting to fade.
This will likely continue as we enter 2021.
Put both factors together, and its clear there’s more runway ahead for this stock, which has recovered well during these challenging times.
Twitter Stock and Political Scrutiny
First things first, you can’t talk about this stock without bringing its political challenges. Sure, the site’s most famous user is on his way out of the White House. But, with about a month left in his term, President Trump isn’t going away quietly.
How? By vowing to veto a high-priority defense bill if Congress did not revoke Section 230 liability protection for social media sites. Why is President Trump doing this? To fight back against what he perceives as bias against political conservatives on this and other popular social media platforms.
Yet, despite his desire to fight big tech, Republicans seem mixed on joining in on the fight. The U.S. House of Representatives passed the defense bill with a veto-proof majority. Just 40 Republicans voted against it.
However, it’s not just those on the political right that are looking to reign in Twitter. Some Democrats are concerned about the site’s perceived inability to police hate speech and misinformation. As such, they are pushing for more scrutiny as well.
Yet, as I said back in October, there’s a silver lining to all this political controversy. The site’s toxic reputation has limited its appeal among advertisers. But, there’s a path for Twitter to escape this bad reputation, and improve its business. How? By improving the moderation of what users can post on the platform.
This, along with improvements in its sales and earnings (more below), could fuel further gains in 2021.
Don’t Let Slowing User Growth and Valuation Scare You Off This Opportunity
Besides politics, concerns over its financial performance have also weighed down Twitter stock. Yet, taking a closer look, things look better than they do at first glance. Don’t let these overstated concerns scare you off this opportunity.
I’m talking about concerns about slowing user growth, as well as concerns about valuation. As seen from third quarter (ending Sept. 30) earnings, the company handily beat expectations. Revenues of $936 million topped estimates of $777 million. Earnings per share of 19 cents were leaps and bounds ahead of Wall Street’s projected EPS of 6 cents.
But, there was one area the company fell short: “monetizable daily active users,” or mDAUs. Analysts expected mDAUs for Q3 2020 to come in at 195 million. But actual results showed an mDAU figure of 187 million.
However, you need to keep things in perspective. While short of what the Street wanted, the current monetizable user base is still up 29% from the prior year’s quarter.
When it comes to valuation, I agree Twitter stock looks pricey at today’s forward price-to-earnings (P/E) multiple. Based on 2021 earnings estimates of 87 cents per share, the stock’s current forward P/E is 54x. That’s well above that of other “big tech” names. Some of which show much stronger levels of top-line growth.
As the company starts to let its foot off the gas with growth investments, earnings will head higher from here. And, as ad demand continues to improve as the pandemic’s impact fades in 2021, there’s even more potential for earnings improvement in the coming year.
Twitter Is a Solid Buy at Today’s Prices
Given how it beat Wall Street’s estimates this quarter, Twitter has strong potential to wow investors yet again in subsequent earnings releases. As the company gets over its current headline-making political headwinds, and focus shifts back to the company’s financial performance, both factors weighing down the stock will start to dissipate.
In turn, there’s additional runway for gains in Twitter stock. Even as shares are just a few dollars below their 52-week highs, consider it a solid buy at today’s price level (around $47 per share).
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.