Last year was rough for Twitter (NASDAQ:TWTR). TWTR stock started 2021 at $54.15 but closed at $43.22, representing a loss of 20.2% for the year. However, given analysts’ estimates for next year, I suspect 2022 will bring a major rebound for the stock.
Since Oct. 19, TWTR stock has fallen from $66.11 to its 2021 closing price in just over two months. That is a huge downdraft of more than 34.6% in a very short period.
The market appears to have been upset by Twitter’s third-quarter earnings release, which came out on Oct. 26. The reaction led to a huge decline in its shares. However, I think this may have been overdone. A good part of the fall in TWTR stock was likely also related to year-end tax-loss harvesting as well.
Where Things Stand With Twitter
Part of the problem in the last quarter was that Twitter ran negative adjusted free cash flow (FCF). For example, in Q3 the company lost $20.2 million in negative adjusted FCF, as can be seen on page 21 of its recent shareholder letter.
Well, that’s the bad news. The good news is that this is not likely to continue. For one, Twitter’s infrastructure investments in data center build-outs will be lower next year.
Secondly, despite the negative performance in Q3, the company has still produced positive FCF year-to-date (YTD).
On top of that, analysts surveyed by Seeking Alpha estimate that revenue will climb almost 22% in 2022 to $6.19 billion. That is an increase in sales of more than $1.1 billion from forecasts of $5.08 billion for 2021.
As a result, Twitter has a very good chance of making positive free cash flow by the end of next year. That will help TWTR stock make a major rebound.
Valuing TWTR Stock
For example, in the first nine months of 2021, Twitter made an adjusted FCF margin of 8.44%. This is based on $296 million in adjusted FCF compared to $3.51 billion in sales for the nine-month period.
Assuming its margin rises to 10% by 2022 year-end, we can expect to see adjusted FCF of $619 million by next year. That is the result of multiplying the 2022 revenue forecast of $6.19 billion by 10%.
As a result, we can use this adjusted FCF estimate to derive a value for TWTR stock. For example, if we use an adjusted FCF yield metric of 1.5%, the value of TWTR stock is at least $41.3 billion. This is seen by dividing $619 million in adjusted FCF by 1.5%. That results in a market cap of $41.267 billion.
This works out to 20% more than the existing market cap of $34.49 billion as of Dec. 31. In other words, TWTR stock is worth 20% more than its price of $43.22, or $51.87.
That price is the minimum amount Twitter is probably worth. If the company makes an FCF margin higher than 10%, or if the market gives the stock a more beneficial FCF yield such as 1%, TWTR stock will rise even more.
What to Do With TWTR Stock
It turns out I’m not the only one who is very positive on the stock. For example, Seeking Alpha’s average of 39 analysts’ price targets in the last 90 days is $63.89 per share. That works out to be 47.8% higher than its Dec. 31 price, which is more than my 20% price target.
The same is true with TipRanks. Their report is that 24 analysts who have written on the stock in the last 90 days have an average price target of $66.73.
In other words, my price target is probably way too conservative. Don’t be surprised to see TWTR stock move substantially higher by the end of the year.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
