Twitter: A Chance To Regain Lost Prominence

| About: Twitter, Inc. (TWTR)

Summary

Shares near public trading lows as earnings approach.

Major global events this year provide extra eyeballs to platform.

Can company monetize the non-logged in user base?

On Wednesday, Twitter (NYSE:TWTR) will report its fourth-quarter results. As earnings approach, shares sit close to their public trading lows, down almost 70% in the past year. As investors continue to worry about the company's strategy, management has an opportunity this year to bring the name back from the dead.

Recently, Twitter's shares were downgraded for the second time in just nine days by an analyst at Stifel on the premise of weak user base growth. Scott Devitt thinks the company's monthly active user growth could actually turn negative in 2016. While many will focus on the user base number, I'm actually more concerned with what Twitter does with the roughly half a billion users who aren't logged in or registered when using the site.

It's time for CEO Jack Dorsey to lay out a strategy, now that he's been at the helm for months. Over the weekend, there was a big uproar after BuzzFeed reported that Twitter was thinking of changing the way it shows tweets. Users took to the web with the hashtag "#RIPTwitter", afraid that changing the site to a more Facebook (NASDAQ:FB) like style with an algorithmic timeline instead of a chronological one was a big mistake. While Dorsey came back and said that Twitter isn't making this change, it goes to the heart of the "what's the strategy" question. Since most questions on the conference call will probably be about strategy and not the financials, Dorsey has the perfect forum to lay out a road map this week. Even if results disappoint a bit, investors may be willing to forgive if management lays out a viable strategy for the future.

That's where 2016 comes in as important due to a couple of major events. The first is the race for the White House, where we don't have any incumbents vying for the presidency. We certainly know that Donald Trump is very active on Twitter, and even the less tech savvy candidates will use the site. The second major event is the Summer Olympics, which should bring a short -term user boost to Twitter later this year. TWTR wasn't publicly traded the last time we had a presidential election, and the last time we looked for a brand new candidate in 2008, the site was just a few years old. The number of eyeballs on the site this year should set a yearly record, so can management monetize those users in a meaningful way?

As of Friday's close, TWTR's shares were trading for roughly 28.6 times expected 2016 non-GAAP EPS. That's actually a bit of a discount to Facebook, which goes for 33.1 times. FB is currently projected for more revenue growth this year currently, 42.0% to 39.9%, but Twitter beats in expected non-GAAP EPS growth, 52.8% to 37.7%. The major issue for Twitter is that it is losing hundreds of millions of dollars per year on a GAAP basis while Facebook is reporting quarterly GAAP profits in the billions.

When looking at the numbers this week, I want to see how much Twitter can reign in its spending, more so than just the job cuts that have been announced. For Q4 2015, analysts expect almost a 50% year-over-year rise in revenues, but non-GAAP EPS are forecast to be flat. While TWTR usually beats on the bottom line, the increase will still show a margin problem. One of the things I appreciated most about Facebook's recent report was that the company was able to keep spending in check, the lower end of guidance, allowing the bottom line numbers to be very impressive. While Twitter will continue to show strong revenue growth, spending growth cannot outpace the top line going forward.

As Twitter gets ready to report 2015 final results, I'm eager to see how the company plans to take advantage of the masses that will flock to the site this year for major events. The company has not been able to grow its user base rapidly in recent quarters or monetize those not logged into or registered for the platform. If management can work some magic, there is the potential for upside with a non-GAAP forward P/E that currently is a discount to Facebook. On the other hand, with a market cap now below $11 billion, a LinkedIn (NYSE:LNKD) like fall probably sets this name up as an acquisition candidate for a larger tech or media corporation.

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