Twitter shares have crept higher in 2020, after going nowhere for a year. And faithful investors may be hopeful the company can turn itself around with earnings on February 6, after disastrous results three months back.
But Wall Street is still getting two big things wrong about the micro-messaging service, says Citi analyst Jason Bazinet, who has just picked up coverage of the group.
“We see two risks for Twitter. First, we believe the Street’s revenue estimates are too high. Second, we believe the Street’s cost estimates may be too low,” he said.
To be sure, the last quarter was a black eye for Twitter. The company posted weaker-than-expected profit, revenue and guidance after announcing an issue with an advertising bug that hit its ability to target ads. That sent shares tumbling around 20%, wiping out gains for 2019.
As for that first risk, the analyst notes that a big chunk of Twitter’s historical revenue growth has come from converting monthly active users (MAU) to daily active users (DAU). But he says revenue per DAU—a crucial metric for the company—hasn’t risen materially in the last four years.
“If Twitter matches best-in-class MAU to DAU conversion, it suggests a revenue ‘ceiling’ of about $5 billion per annum,” said the analyst. As Wall Street forecasts are shooting well past this level for 2023, he expects the Street to downgrade revenue outlooks for 2021 and 2022 as that ceiling nears.
The second risk is that Wall Street is undershooting cost forecasts for Twitter, such as stock-based compensation and depreciation and amortization expenses. The Street expects those costs to represent around 20% of revenues by 2022. But Bazinet notes that Twitter’s own outlook is in the 23% to 30% ballpark.
Also, Twitter hasn’t invested as much as Facebook in trying to combat fake news, so those costs could also rise.
Looking ahead: Citi’s Bazinet rates Twitter neutral with a price target that he just pushed down to $35 from $36. That still implies some gains from here as Twitter shares closed at $33.22 on Thursday.
He says the outlook won’t change until Wall Street gets a bit more real about Twitter’s financials.
And if Wall Street is going to start waking up here, then a tough stretch for Twitter stock may not quite be over.
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January 31, 2020 at 08:54PM
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What Wall Street Is Getting Wrong With Twitter Right Now, According to Analysts - Barron's
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