Twitter (TWTR) just reported its Q2 results. The results weren't bad as the company surpassed analysts' expectations on the revenue and earnings front. Revenues were down 4.6% Y/Y and EPS was down 38% from 13 cents to 8 cents. Twitter generated $574 million in revenues this quarter. Also, MAUs were up 5% Y/Y and DAUs were up 12% Y/Y. In Q1, Twitter's DAUs increased 14% Y/Y (the company doesn't report how many users are using its service daily). Also, it's worth to mention that adjusted EBITDA was much higher than management expected ($105 million expected vs $177 million actual).
We believe that using traditional valuation metrics, Twitter is ridiculously overvalued. Over the last 3 quarters, Twitter generated weak revenue growth as the growth rate of MAUs cooled down. Also, the company seems unable to extract significant revenue from its users as cost-per-engagement is going down at a worrying rate. In Q1, Twitter's cost-per-engagement declined 63%. So, in order to offset this decline, Twitter needs to increase the number of engagements, which is dependent on DAUs/MAUs being higher. In Q2, Twitter did not report its engagement metrics.
Note: In Q2, Twitter did not report its engagement metrics.
Twitter's MAUs remained constant at 328 million when compared to Q1 numbers. This implies limited upside for the company in terms of MAUs. We believe that the only hope for Twitter to increase revenues is to increase DAUs. However, even in the best case, that's still not enough for a $14 billion company.
For instance, Twitter's revenue per MAU was $1.75 in the second quarter. That's less than half Facebook's (FB) $4.55 figure. If we assume that all monthly active users became daily active users (a generous assumption), and Twitter generated $4.55 per user (reaching Facebook's abilities), Twitter would generate $1.5 billion in quarterly revenues. On an annualized rate, that's $6 billion.
At current valuation, Twitter would be trading at 2.3x its best-case (or impossible case?) revenues. For a company that increased its MAUs by 5% Y/Y this quarter and 3% last year, that's an over-generous valuation.
We believe that the company being a likely takeover target is the only reason the stock is trading at current levels. Indeed, that's the only reason we are holding the stock. We believe that Twitter's user base is strong and "in love with the brand" which is great as this should translate to higher engagement over time.
However, that's not enough.
If over the next 6 months the company does not impress us with MAU growth, we would like management to announce that it's seeking strategic alternatives, so interested parties would be forced to give an offer quickly. We also would like to see a full-time CEO for the company as the current situation urgently needs this kind of leadership. By appointing Ned Segal as CFO, the company is making its first step in adding talent to its management team as Ned has tremendous experience in his work at Goldman Sachs where he focused on technology companies and had relations with many tech investors.
We remain cautious on Twitter stock and we rate it as a "hold".
This article was written by
Disclosure: I am/we are long TWTR. 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.