Twitter: Keeping The Faith Alive?

| About: Twitter, Inc. (TWTR)


TWTR will report on the Wednesday. Investors should not expect much upside catalyst after the stock's 35% decline in price over the past month.

SMB should be a bigger revenue driver down the road.

Valuation of 40x CY2016 is reasonable but still rich relative to other social media platforms.

Twitter (NYSE:TWTR) will report its Q4 earnings on Wednesday after-market. The stock has been down 32% since the beginning of the year as the platform continues to lose customer traction amid increased competition from Facebook (NASDAQ:FB) (see - Facebook: Firing On All Cylinders). In my view, TWTR is facing several structural challenges that have placed the company in a tough spot. First, competition from FB will continue to increase and engagement could continue to migrate away from TWTR due to its declining network effect. Second, the shift in engagement from traditional social networking and social media sites due to the growth of the mobile messengers could potentially be a long-term threat to TWTR. That said, I remain cautious on TWTR ahead of the quarter.

Consensus expects revenue of $710m, +48% y/y, and EPS of $0.12. I do not believe that this quarter can provide investors with any upside catalyst. If anything, the stock could fall further if guidance or operating metrics continue to disappoint. At 40x 2016E earnings, the valuation has come down drastically over the past year when it was trading at around 150x earnings. However, I see further room to disappoint as I do not see TWTR having the ability to justify its relevance as mobile messengers become bigger threats.

TWTR has the right platform, but the execution has been rather poor with ongoing user deceleration. Notably, the company is losing its mass-market appeal, with users migrating to more established social networks such as FB and WhatsApp. On the other hand, TWTR certainly benefits from the ad dollar shift to digital properties, and with its 300m MAUs, the platform remains a must-go place for advertisers to connect with their audience.

Focus on the quarter will be the MAUs operating metrics and engagement trend, but I believe a more important metric lies in its SMB advertiser base. I believe that TWTR will have a better shot catering to the small and medium businesses. The company currently has 100k in SMB advertisers, which is twice as much as it did a year ago and suggests that its ad products are gaining traction. Although I contest that TWTR needs to attract at least 750k SMB advertisers to be relevant, I give credit where it is due and TWTR appears to be executing on the SME front. With an addressable market of roughly 10m SME customers, TWTR certainly has upside potential, in my view.

Finally, improving product adoption will be another focus given that its existing product still has a learning curve and is not user friendly to the masses so it needs to do more to address this issue. Although TWTR will most likely stay relevant in the near term, it still faces the structural engagement shift from social media to social networking apps. I often cite Weibo's (NASDAQ:WB) market share loss to Tencent's (OTCPK:TCEHY) WeChat in China could be a precursor to TWTR losing share to FB Messenger as the platform scales up (See - Facebook: 2016 Outlook - Messenger And Virtual Reality).

Conclusion: I remain cautious on TWTR. Top pick within social networking platforms remains FB.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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