bigtunaonline/iStock Editorial via Getty Images Look across the internet’s most-used and most-loved sites and services, and at least from a public stock perspective you’ll see only a sea of red. Over the past few months, investors have heavily sold off tech names in response to macro fears over Russia/Ukraine tensions and rising interest rates – leaving many big-brand companies trading below their intrinsic value.
Twitter (NYSE: TWTR ), in particular, is one decliner to watch. After years of stagnation, Twitter is back in growth mode. On top of growing monetizable daily users (mDAUs, and the primary user metric that Twitter now reports), the company has also revamped its ad sales efforts and driven materially higher advertising revenue, on top of the tertiary revenue streams that it generates from data licensing. Backed by a lofty vision for Twitter’s future as well as aggressive financial targets for FY23, Twitter looks appealing at its current share prices which are ~40% down over the past year: Data by YCharts Rediscovering the bullish thesis for Twitter at a much more modest valuation
I was previously more hesitant on Twitter. Back in August, when Twitter was trading closer to $60 per share and its most recent quarterly print had shown a decline in its U.S. user base, I expressed concern on Twitter’s future and published a neutral opinion on the stock. Now, however, with improved fundamentals under its belt as well as a lighter valuation base, I’m much more sanguine to the possibility of Twitter outperforming (perhaps dramatically) the broader markets as a recovery rally gets underway.
Here is a refreshed view of the bullish drivers behind Twitter: Twitter has differentiated itself against other social media platforms by leaning into the news angle. In my view, the combined market of Instagram/Snap/TikTok all faces a very saturated and limited audience, in which total engagement hours/active users will only shift between which app is hottest at the time (which may be very well a new entrant by next year, given how rapidly new trends catch on in today’s internet). Twitter, on the other hand, has (perhaps by accident) fell into a niche of delivering news and updates from influencers and celebrities, which insulates it from direct competition versus other social media platforms.
Growth in direct response marketing. On its advertising strategy, Twitter has made a conscious shift toward direct response ads – which are ads that push users to take specific actions, such as watching a product video or signing up for a free trial. Today, the revenue mix between standard brand ads and direct response is 85/15; over time, Twitter sees this shifting to 50/50. Given the higher value of engaged customer responses, this shift will help make Twitter more successful in a crowded internet advertising landscape.
Twitter Blue. Though still a nascent product, Twitter launched Twitter Blue in 2021 in select markets including the U.S. This is Twitter’s first-ever subscription product, priced at $3.49/month for U.S. users, which offers premium features such as optimized mobile reading mode, the ability to undo or revise a posted tweet, as well as organize content into folders. Taking the “freemium” route gives Twitter an entirely new revenue stream and boosts its monetization without any impact at all to existing users who want to keep using Twitter for free.
History of profitability and cash flow. Twitter has long been profitable (at least on a pro forma basis; GAAP breakeven isn’t that far off either) and generated strong cash flows in every year except the most recent one. While in recent years the company has invested heavily in product and headcount to support its business model transition, the high-margin nature of advertising/subscription revenues makes Twitter a very scalable business.
Aggressive and re-affirmed FY23 targets. Twitter has re-affirmed its goal of hitting $7.5 billion in revenue (+48% to its FY21 scale) and 315 million in mDAUs (+45%) by the end of FY23.
In spite of these strengths and the robust target Twitter has set for itself over the next two years, the company is currently trading at what I believe to be an opportunistic valuation. At current share prices near $37, Twitter trades at a market cap of $29.98 billion. After netting off the $6.39 billion of cash and $4.25 billion of debt on Twitter’s most recent balance sheet, the company’s resulting enterprise value is $27.84 billion.
For the current fiscal year FY22, meanwhile, Wall Street analysts are expecting Twitter to generate $5.87 billion in revenue, representing 18% y/y growth – which is roughly […]
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