How Twitter Gets To $55

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About: Twitter, Inc. (TWTR), Includes: BABA, FB, GOOG, GOOGL, NFLX, SNAP
by: Stone Fox Capital
Summary

Loop Capital initiated Twitter with a price target of $55.

The big target was hidden amongst a large upgrade of tech stocks.

Twitter could reach the target via pushing DAU growth up to 20% and further improving monetization.

After tech stocks got beaten down in May, Loop Capital upgraded the sector with some surprisingly large price targets. The most notable target price was slapped on Twitter (TWTR), implying the highest stock price since shortly after the IPO back in 2013. The price target implies a hefty gain, but the social-media stock has a clear path to reach this goal.

Twitter World Cup #

Image Source: Twitter

Aggressive 60% Target

Loop Capital is known for bold calls on tech stocks, but the analyst firm had one of their most aggressive calls to start June. The firm came out and aggressively upgraded Chinese tech stocks along with a few American companies.

The price targets implied some solid 20%+ gains for beaten-down large tech stocks like Netflix (NFLX) and Alphabet (GOOG, GOOGL). What the market mostly missed is the firm initiated Twitter with a $55 price target that implied a 60% gain to start the month.

The price targets on the Chinese stocks like Alibaba (BABA) were equally impressive, but those stocks come with the additional risk of the trade war. The Loop Capital analyst sees Twitter as having the capability to capture a more mass-market opportunity:

There is still home-run potential available to the company. We think there is a mass-market use case for an interest network and that Twitter is still best positioned to capture this opportunity

The one negative on the stock reaching $55 is that the valuation isn't exactly cheap. Twitter actually trades at a higher EV/S multiple then Facebook (FB) trading at 6x '20 sales estimates. The stock is cheaper than Snap (SNAP) presumably providing some upside via pure multiple expansion.

Chart Data by YCharts

How The Stock Gets There

The obvious path to reaching a price target of $55 or the equivalent of a market cap of $43 billion is expanding the user base. Under the leadership of Jack Dorsey, Twitter has grown the daily active users (DAUs) by ~10% on a quarterly basis, but the company hasn't reached the mass-market penetration that would lift off the stock.

Rich Greenfield on Twitter

Right now analysts are prescribing 15% revenue growth suggesting DAU growth in the 10% range leads to 1.5x revenue expansion. In the last year, Twitter actually grew revenues by about 2.0x the DAU growth rate.

The clear path to higher stock prices in the next year is generating 20% DAU growth that would lead to 30% revenue growth. The consensus estimates for $4.06 billion next year and $4.60 billion in 2021 would suddenly become $4.6 billion and $6.00 billion. Analysts don't forecast Twitter reaching over $6.0 billion now until 2024. The key to this numbers is that the social site has the rest of 2-19 to ramp up DAU growth to the 20% range.

Source: Seeking Alpha earnings estimates

The vast major discrepancy in any future value in Twitter is whether one believes user growth has peaked or the company has the ability to substantially expand MAUs from the current 320 million range to even 500 million and beyond to eventually reach 1 billion.

The ability to expand revenue growth at a faster clip than user growth is based on the ability to monetize users at a higher clip. Facebook has 2.4 billion users that monetize at a rate of ~$26 over the last 12 months.

Source: Facebook Q1'19 presentation

Twitter is down at 2019 targets of ARPU of only ~$11. The ability exists to both grow users and monetize those users at a substantially higher clip.

Using the Snap EV/S multiple of 8.3x a new '20 revenue target of $4.6 billion and a net cash balance of $4.8 billion gets the stock to a market cap of $43 billion or roughly $55. As the company rolls into '20 and the stock is valued based on a '21 revenue target of $6.0 billion, the market cap could soar to $55 billion or a stock price of $70.

Takeaway

The key investor takeaway is that Twitter still has to improve the service in order to drive DAU growth to the 20% range. The opportunity still exists to make the social-media site a more main stream service that would lead to much faster user growth and higher monetization.

The stock has a clear path to $55 and $70 or the next couple of years. Following the stock rally to $38, Twitter still has 45% upside to reach the Loop Capital target.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.