Twitter (NYSE: TWTR) is set to report earnings on Thursday after the closing bell and investors with a short-term focus are rather bullish on the stock. Granted the stock is up over 100% in the past year and may deserve the bullish sentiment, but my concern is that the expectations are too high.
Let's break everything down between the fundamentals, the sentiment, and the technical analysis. The weekly chart shows the tremendous run the stock has been on since last summer and it has gone through a brief consolidation over the past few months. The consolidation has allowed the 10-week RSI to move out of overbought territory, but the weekly stochastic readings remain in overbought territory.
You can also see how much of a gap there is between the current price and the 52-week moving average. That huge spread shows the tremendous upside momentum the stock carried in to June and is a bit worrisome.
Turning our attention to the fundamental analysis, Twitter has seen earnings grow at an average rate of 16% over the past three years and in the last earnings report the EPS grew by 129% over the previous year. The consensus estimate for the current quarter is $0.17 per share and that will be compared to last year's EPS of $0.08. The estimate for this quarter has remained constant over the last 60 days and that is somewhat encouraging as it means analysts haven't raised the bar.
Sales haven't been growing as fast as earnings, but have been growing at a rate of 13% per year over the last three years and grew by 21% last quarter. Analysts are predicting revenue of $696.2 million for the current quarter and that is 21% above last year.
My biggest concerns regarding Twitter's fundamentals are the margins and return on equity. The profit margin is okay at 21.4%, but the ROE is only 6.8% and the operating margin is only 6.67%. For comparison purposes, Facebook's ROE is 27.3%, its profit margin is 50.7%, and its operating margin is 50.07%. It is also worth mentioning that since the beginning of 2016, the stocks have posted similar gains with Facebook gaining 101.5% and Twitter has gained 87.2%.
The sentiment toward is somewhat intriguing in that the indicators I consider to be more short-term in nature are showing extreme bullishness while the long-term indicator I look at is decidedly more bearish. The short-term indicators I value most are the short interest ratio and the options open interest put/call ratio. The short interest ratio is at 1.67 and the short interest declined by over three million shares in the latest report.
For the options open interest, I looked at the weekly options that expire on Friday and the regular monthly options that expire on August 17. Collectively there are 133,189 calls and 65,500 puts open as of the close on Monday night and that gives us a put/call ratio of 0.492.
As for the long-term sentiment indicator, I like to look at the analysts' ratings in that manner because analysts don't tend to make abrupt changes to their ratings. That being said, there are 36 analysts covering Twitter and only four have the stock rated as a "buy" while 11 have it rated as a "sell" and 21 have it rated as a "hold". For a stock that has gained over 100% in the past year and has the earnings growth of Twitter, that is decidedly bearish sentiment from the analysts.
Looking at the last four earnings reports for Twitter, the company has exceeded the consensus estimate each time and it has done so rather easily. Even with the big surprise beats, the stock has only jumped higher on two of the four occasions.
Breaking it down to get the whole picture, each of the three analysis styles are mixed as far as I am concerned. I like the upside momentum the stock has, but I am a little concerned with how far ahead of its 52-week moving average the stock is. I like the earnings growth the company has experienced, but wish they could improve the ROE and margins. The sentiment is also mixed as the short interest ratio and put/call ratios reflect extreme optimism while the analysts are far more bearish than I would have expected.
The bottom line is that I wouldn't buy Twitter ahead of earnings because of the short-term sentiment. I think there is a greater chance of a dip than a jump. If the stock does dip in the coming weeks, it might wash out some the optimism and present a buying opportunity.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.