Twitter stock price at the time of Publication: $31 per share.

 You can download the PDF version of the report by pressing here. 

When Twitter was trading at $15 per share and no analyst dared to issue a “buy” rating on the stock, we initiated 3 “buy” calls citing the importance of Twitter’s data to big players like Disney, Time Warner, and Comcast which we valued (Twitter’s data) at $25 to $30 per share.

Today, we are issuing a “cautious” rating on the stock. The stock price may increase over the short-term as sentiment is the highest in years for Twitter, however, we recommend our followers to put a stop-sell order at $28 per share as breaking that level would break the strong uptrend that has been in place since the beginning of the year.

What fundamentals show

From a fundamental standpoint, we believe the upside is very limited for the stock. Our previous valuation of $25 to $30 per share was based on a hypothetical acquisition price that may value the company’s data and possible synergies at that level. However, by being a standalone company, Twitter can’t monetize its data well enough to justify a current valuation. And since the valuation is already rich, we put a low probability that a company may pay a premium at current stock levels.

Our analysis is based on the idea that even if Twitter achieved Facebook metrics in average annual revenue per user, the stock still has limited upside given tepid monthly-active-user (MAU) growth.

For instance, last year Facebook generated $84 per each MAU in the United States and nearly $20 per each MAU from outside the US, applying for these numbers on Twitter’s 68 million in the US and 262 million MAU outside of it gives Twitter a best-case annual revenue of $11 billion only. Given Twitter’s current market cap of $23 billion, that is a very rich valuation, especially when taking into consideration that Twitter generated only $21 per MAU in the US which is quarter of Facebook’s figure.

Another thing to take into consideration is that Facebook converted 46% of its revenues to free-cash-flows which is exactly double Twitter’s figure when taking capital lease payments into account. All that while using much less stock-based compensation that the later.

This suggests that Twitter’s road to proper monetization of its user base is still at an early stage and current valuation cannot be justified without an impressive US MAU - US MAU is much more important than worldwide figure given the higher digital ARPU in the US-  growth which is not giving us any reason to be optimistic.

Last but not least, Twitter’s ad engagement growth fell from 208% 2-years ago to 75% in Q4-2017 which suggests that the low hanging fruit has been picked and it’s tougher going forward to achieve impressive growth in ARPU.

Figure 1 Source: Twitter 2017 10-K

Final thoughts

As we are living in the “age of data”, we believe in the value of Twitter’s data. However, we remain skeptical that Twitter will be able to fully monetize its current data without meaningful growth from the US-based MAU in a way that suits its current market value. We are cautious on the stock and recommend investors who followed us into the Twitter long-trade starting August 1, 2017, to sell their holdings and wait for a better entry point.

Celeritas Investments.