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Summary

  • Twitter's management felt the World Cup impact on Q2 results were de minimis.
  • I estimated Twitter's Q2 2014 revenue excluding the World Cup impact at $270 million, or $42 million less than the $312 million actually reported.
  • At 18x - 20x run-rate revenue sans World Cup, Twitter is valued at $31 - $34 per share, or 31% - 24% below its current price of $45.
  • Twitter is a sell.

After Twitter, Inc. (NYSE:TWTR) experienced a deterioration in operating metrics heading into Q2 earnings, I thought it would be D-Day for Twitter. However, the company exceeded the Street's estimates on growth in revenue, growth in monthly active users ("MAUs") timeline views, and user engagement. Management deflected questions over the World Cup impact on Q2 earnings, implying that outperformance was driven by product changes implemented by management. I fully expected the company to show results with and without the World Cup impact, similar to how Comcast Corporation (NASDAQ:CMCSK), (NASDAQ:CMCSA) showed the impact of the Sochi Olympics on its Q1 2014 results. At least one other analyst was suspicious of Twitter's Q2 results:

Eric Bleeker, analyst at the Motley Fool, told CNBC he wasn't quite buying the World Cup down-play from Chief Executive Dick Costolo, who stressed on the analyst call and in media interviews later that growth in monthly active users came from product changes, not the soccer event. Bleeker advised investors watch the next quarter to see if growth can keep going without such a huge event.

World Cup Impact On Valuation

There is no need for Bleeker or the investment community to wait for next quarter to determine the World Cup impact on Twitter's Q2 earnings. I have decided to do it for them. Below are the company's actual Q2 revenue versus revenue excluding the impact of the World Cup:

(click to enlarge)

  • The chart shows three month actual results for Q1 2014, Q2, 2013 and Q2 2014. The column for operating metrics and revenue excluding the World Cup attempts to normalize Q2 2014 results.
  • Twitter's CEO Dick Costolo said the World Cup did not impact MAU growth. I kept MAUs of 271 million the same as actual results.
  • Users were more engaged during the World Cup. This is reflected in the company's timeline views per MAU of 638 during Q2. I muted this by keeping timeline views per MAU at 615, which was the same as Q1 2014.
  • Advertising rates of $1.60 per 1,000 timeline views exceeded the company's previous peak of $1.49 set in Q4 2013. Rates declined to $1.44 in Q1 2014.
  • I assumed the sudden increase to $1.60 was due to the additional exposure advertisers received from the World Cup. To mute the World Cup impact, I lowered rates back to $1.44. I could have been justified in lowering them further since they ware already trending down.
  • Timeline views per MAU of 615 and 271 million MAUs generate timeline views of 167 billion. A rate of $1.44 per 1,000 timeline views generates ad revenue during the quarter of $240 million.
  • Since Q2 2014 data licensing and other revenue was about 11% of total revenue for Q2 2014, I kept the ratio the same when determining the World Cup impact.
  • Total revenue excluding the World Cup impact is $270 million, or $42 million (13%) less than the $312 million actually achieved in Q2 2014.
  • Such revenue represents a 94% increase Y/Y and 8% increase Q/Q. Actual Q2 revenue was up 124% Y/Y and 25% Q/Q.

Valuation Impact

Excluding the impact of the World Cup, I value Twitter from $31 to $34 per share.

  • The above chart shows Twitter's run-rate revenue of $1.0 billion. This combines Q1 2014 revenue of $250 million and Q2 2014 revenue ex-World Cup of $270 million to derive $521 million.
  • Annualized, this equates to a run-rate of about $1.0 billion.
  • Run-rate revenue at a multiple of 18x - 20x (Twitter traded from 20x - 23x heading into earnings) equates to an equity value of $19 billion - $21 billion, or $31 - $34 per share. The lower valuation multiple is justified given the lower revenue growth rate after excluding the World Cup impact.

Conclusion

Excluding the impact of the World Cup, I estimated Twitter's Q2 revenue at $270 million, or $42 million less than actual revenue of $312 million. Based on run-rate revenue multiples of 18x - 20x, Twitter's equity value excluding the impact of the World Cup is $31 - $34 per share. Twitter currently trades at $45 per share. I rate the stock a sell.

Source: Excluding World Cup Impact, Twitter Is Worth $31 - $34 Per Share