On Wednesday, April 26, Twitter Inc (NYSE:TWTR) reported its latest financial results, which despite a drop in revenue led to a significant rally. For fans of TWTR stock, this now begs the question of whether the latest rally is finally the start of a better trend higher.
I say take things step by step. First, let’s focus on a well-defined next upside target.
Plenty of hedge funds and other so called “smart-money” investors that I speak with have been burnt by Twitter stock over the past few years. It’s simple: They were bullish on what easily could have been a much better growth story than what TWTR turned out to be. After all, everyone knows Twitter, and a seemingly easy-to-fix problem was to make the platform more user-friendly.
Yet, what some called company “mismanagement,” topped off with not-so-good public relations, led to increasingly more investors jumping ship. Just a couple of weeks ago, TWTR stock hit fresh year-to-date lows.
In the latest quarter, analysts were quick to point out that revenue slipped, despite the company beating both top- and bottom-line analyst estimates.
At the end of the day, though, growth stocks like Twitter need to see growth in users and user engagement to get investors excited, and last quarter seemed to deliver both. Twitter’s daily active users climbed 14% year-over-year, and monthly active users were up 6%, to 328 million. Skeptics raise concern that a good amount of this growth comes to the credit of President Donald Trump, who famously uses Twitter to communicate with the public.
Other bright spots in Twitter’s latest quarter were an improvement in revenue from video advertising on its platform.
TWTR Stock Charts
Switching to the charts, we see that from a multiyear perspective, the week-to-date rally in Twitter shares has pushed them up against the well-defined black diagonal resistance line after a dismal few years of moving lower.
At the bottom of the chart, I plotted the stock versus the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ), and you can see that on this relative basis, TWTR has been a disaster versus other tech stocks.
This week’s pop in Twitter stock is improving the ratio a little, but investors and traders should continue to closely monitor the relative performance of the stock in coming weeks and months.
On the daily chart, we see that after a few weeks of very narrow-range trading (lower blue box), this Wednesday’s rally blasted the stock out of this range — and, as of Thursday’s close, above its 100-day moving average (blue).
From a technical perspective, a next possible (and well-defined) upside target is the top of the down-gap from Feb. 9 (i.e., the highs before the February earnings report). This upside target ranges from about $18 to $18.70.
Tactically speaking I am now looking to initiate a small long position in the stock and using September at the money call options spreads to lever up this bet a little. Any daily close back below $15.70 would stop me out of the options trade and a weekly close back below $15.50 would stop me out of the stock.
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