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Summary

  • The recent acquisitions made by Twitter will make a great contribution to its mobile ecosystem and attract more advertisers.
  • There are good chances that the stock might experience a downfall, in spite of good results, as happened in last quarters. Therefore, the risk quotient is reasonably high.
  • It isn't advisable for an investor to create a position in Twitter at the current price level because it's overvalued. In near term, the probability of a price fall is high.

One of the paths to quick growth and expansion is through acquisitions, and there is no better testimony to it than Google (NASDAQ:GOOG) (NASDAQ:GOOGL). May it be YouTube, Android or any other of Google's famous acquisitions, the company has been a fierce acquirer since its inception. Of late, it seems that Twitter (NYSE:TWTR) has also embarked on a similar path, as evidenced by its acquisition of TapCommerce, the owner of a leading mobile ad retargeting platform, preceded by the buyout of Namo Media, a native ads platform. Let's analyze if these acquisitions, along with Twitter's current state of affairs make it a buy.

Twitter is on an acquisition spree

In a recent move, Twitter acquired TapCommerce with the objective of enhancing its mobile ads portfolio (Read the full details of the acquisition here). In my last article on Facebook (NASDAQ:FB), I pointed out the extreme significance of mobile for online advertisers and how Facebook, one of Twitter's important rivals, is beefing up its portfolio of mobile ad platforms for advertisers. Therefore, in acquiring TapCommerce, Twitter has made a prudent move, because this alliance will allow Twitter to offer features like programmatic buying, app re-engagement and other managed solutions to mobile app marketers.

The race in mobile

For the last few quarters, Twitter has been making vigorous efforts in order to expand its mobile ads portfolio. In fact, the acquisition of Namo Media, a native ads provider, is also a major addition to Twitter's mobile business, as it enables the company to bring native ads to mobile app publishers to create a seamless and less intrusive ad experience for users.

Native ads have always impressed advertisers because of the strong ROI proposition they bring to the table. Since ads are mixed with the regular news feed and targeted to a user's precise behavior on the internet, these ads possess immense potential to bring conversions. Therefore, acquisitions of these sort are sure to push up Twitter's standing as an online ad platform for advertisers.

Do not worry much about results

While mobile is an interesting field and Twitter is making big changes to its mobile portfolio to be in the game, the poor results delivered in Q1, 2014 did not escape the glare of investors. The sequential growth in revenue fell steeply to 2.8%, as the company delivered a revenue of $250 million in the first quarter. Post-results, the share price fell to a low of $30.66 from a price of $42.62 (i.e. the price it was trading at pre-results). Since then, the stock has surged back to the $40+ level on the back of major changes it made to its user interface to increase engagement and growth in absolute number of users.

The point I intend to convey is that it is not unnatural for a company to experience a volatile run in the first few quarters of listing on the exchange. The online ad space has been expanding aggressively with new social platforms like Pinterest, Yelp (NYSE:YELP) etc. that are enjoying overwhelming popularity among people. As such, it is highly possible for a company that is still in its nascent stage in the online ads business to experience bad business cycles. Investors should not be shaken by the movement in revenue and focus more on Twitter's ability to grow users and frame strategies to monetize the user base.

High probability of a volatile future

Twitter's shares took a reasonable beating after reporting its first-quarter results, as well after the fourth-quarter results were reported last year. This happened in spite of the fact that the company comfortably beat the top and bottom line estimates. Now, it is poised to declare the results for Q2, 2014, for which analysts are expecting revenue in the range of $275-$280 million (i.e. on the higher end of the guidance given by Twitter). Hence, the company faces a big challenge in meeting the rising expectations of analysts and investors, and more so because the company is dangerously overvalued when compared to the online ads industry.

Hefty valuation and high risk

Currently, Twitter is trading at 165 times, as per Alpha Omega Mathematica, while its closest peer Facebook is cruising at a forward P/E of around 86. Similarly, Twitter's P/S ratio stands at approximately 30.97 as compared to the industry average of 10.67, highlighting an overvaluation. Hence, the risk with investing in Twitter is that the stock might slide heavily, as it happened after the Q1 earnings, in spite of commendable results.

There is hardly any doubt about the fact that Twitter has a firm presence in the micro-blogging segment of social media and that its user base is growing at a reasonable pace (In Q1, 2014 the monthly active users grew to 225 million). However, being a conservative investor, I would not advise putting money in the stock because of its hefty valuation.

To make it clear, I am by no means discrediting the efforts being made by the company in strengthening its user engagement tools and mobile portfolio, but being an early-stage company in the online ads business, the risk of volatility is considerably high in the near term.

Source: Despite Positives, Twitter Is Not A Recommended Buy For The Near Term