Why Twitter Needs To Pull A Facebook On Wednesday

Feb. 4.14 | About: Twitter, Inc. (TWTR)

Twitter Inc. (NYSE:TWTR) is set to report FQ4 2013 after the market closes on Wednesday, February 5th. Since the company's IPO back in November, Twitter's stock has run up over 40% from initial trading prices to $65. Wall Street is forecasting an 89% increase in FQ4 sales in Twitter's first earnings report as a publicly traded company. Recently fellow social media company Facebook (NASDAQ:FB) reported its quarterly earnings and wowed investors with a 63% yoy revenue increase and an 82% increase in yoy profit. Twitter has not quite reached profitability yet but social media companies are growing their earnings at much faster rates than Wall Street has predicted. Here are 2 graphs from Facebook and LinkedIn (NYSE:LNKD) to prove it.imageimage

The big question for Twitter this quarter is whether or not they can monetize as well as Facebook has. One area where analysts will look for growth is in mobile advertising, where near the end of Q3 Twitter touted 232 million monthly users. With increasing smartphone penetration mobile ad growth is an obvious target for Twitter and is an area where Facebook has executed. If Twitter is going to satisfy investors this quarter the company will need to open up the revenue faucet and show over 90% yoy sales growth. Here's what analysts and investors are expecting from Twitter Wednesday.

The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.image

(Click Here to see All Estimates for Twitter )

The current Wall Street consensus expectation is for Twitter to report -2c EPS and $212.11M revenue, while the current Estimize.com consensus from 64 Buy Side and Independent contributing analysts is -2c EPS and $215.36M revenue. This quarter the buy-side as represented by the Estimize.com community is expecting Twitter to report in-line with Wall Street on profit, but beat expectations on revenue.

Last quarter was the first time Wall Street submitted a consensus expectation for Twitter in anticipation of the company's November 6th IPO. Back in October the consensus from Estimize.com was more accurate than Wall Street in predicting both Twitter's FQ3 EPS and revenue. By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non professional investors Estimize has created a data set that is up to 69.5% more accurate than Wall Street, but more importantly it does a better job of representing the market's actual expectations. It has been confirmed by an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus. This means that the revenue bar that Twitter needs to match has been set even higher by investors than the consensus from Wall Street.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case we are seeing a smaller differential compared to recent quarters. image

The distribution of estimates published by analysts on the Estimize.com platform range from -7c to 0c EPS and $195.00M to $248.99M in revenues. This quarter we're seeing a larger distribution of estimates compared to other quarters.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A larger distribution of estimates signaling less agreement in the market, which could mean greater volatility post earnings. image

Throughout the quarter the EPS consensus from both Wall Street and Estimize dropped from -1c to -3c before recovering to -2c. Over the same period of time Wall Street has raised its revenue expectation from $208.00M to $212.11M while the Estimize community elevated its consensus from $203.37M to $215.36M. Timeliness is correlated with accuracy rising expectations going into the report are often a bullish indicator. The report of how strong Facebook was able to monetize mobile ad revenue may have pushed analyst expectations for Twitter higher.image

The analyst with the highest estimate confidence rating this quarter is jesseyoungmann who projects -1c EPS and $213.79M in revenue and self identifies as an Information Technology professional. In the Winter 2014 season jesseyoungmann is rated as the 163th best analyst and is ranked 347th overall among over 3,750 contributing analysts. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case jesseyoungmann is making a bullish call expecting Twitter to beat Wall Street's expectations on profit and revenue, although jesseyoungmann is not expecting quite as much revenue as the Estimize consensus.

Although Twitter stock is flying high right now, the company has a lot to live up to in Wednesday's report. Analysts on Estimize.com are expecting Twitter to report in-line with Wall Street expectations on EPS but the demand on revenue is even higher. If Twitter fails to to live up to the steep expectations the stock could be in for a correction. On the other hand, Twitter has a wide base of users and strong engagement. If Twitter can pull off a Facebook and get mobile ads right this quarter, TWTR could be set to flap its wings and surge higher.

Disclosure: none