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Twitter: An Offer On The Way?

Celeritas Investments profile picture
Celeritas Investments


  • Twitter reported an impressive first quarter results.
  • It seems that the stock won't re-test its lows in the medium term.
  • An acquirer would move now after Twitter's stock price stabilizing.

When Twitter (TWTR) announced Q4 results months ago, we issued a " sell" rating on the stock. The stock was down 15% after that. However, last week opened the possibility for a major turnaround in Twitter's depressing story, and increased the chances of the company having an offer in the coming months.

Impressing Q1 results

Last week, Twitter announced its first quarter results for the current fiscal year. What we liked in the report are two things; the surprising increase in DAU/MAU, and the higher FCF which is accompanied by lower stock-based compensation.

Twitter increased its DAU and MAU by 14% and 2.8% respectively. The quarterly increase in DAU gives Twitter 4 consecutive quarterly increases in DAU. Thus, it seems like a trend is being formed.

The number of daily active users is now up more than 17% since Q1 2015 levels. That's remarkable taking the negativity surrounding the platform into account.

It seems that Twitter management is knowing how to invest deep learning in the platform effectively. According to management's letter to shareholders, the company is continuously investing in deep learning techniques such as notification engineering, which is increasing engagement and bringing lost users back to the platform.

What also astonished us is the increase in Twitter's free cash flows. The company managed to increase its FCF (adjusted by capital leases) by 26% to $126 million. That increase is accompanied by 40% reduction in stocks issued as compensation to the sales and marketing team (SBC decreased 22% overall), which means that Twitter will have a high margin in substituting cash payments with stocks going forward to boost its FCF when it needs to.

Why the current valuation of Twitter is attractive?

Using DCF analysis, we believe that Twitter stock is rightly valued, which make it a suitable acquisition candidate. Using inputs of

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TWTR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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