Twitter: Land Of Opportunity

Summary

• Twitter has seen record usage and downloads during the Q2 events.
• Revenue forecasts aren't matching user growth, providing upside to estimates as events return.
• The stock is now the cheapest in the social media space at 5.4x EV/S while revenue estimates are too low.
• This idea was discussed in more depth with members of my private investing community, DIY Value Investing. Get started today »

About the only stay-at-home play not seeing new highs is Twitter (TWTR). The social media stock has already verified record usage and daily app installs, but the company struggles monetizing users. My investment thesis remains very bullish that the company will eventually figure out how to monetize users at far higher rates and push the stock back to yearly highs similar to Facebook (FB).

Surging Traffic

In the course of five years, Twitter has gone from being the next MySpace fading into oblivion to having surging engagement. The social media service actually topped the other sites with traffic growth in Q1. Twitter went from no user growth back in 2015 to 27% mDAU growth exiting the quarter for a new rebound high. Prior to Q3 last year, Twitter hadn't topped 14% user growth going back over 5 years.

Source: Rich Greenfield Twitter

On top of the COVID-19 pandemic, the recent civil unrest has flooded people to Twitter. The site has long been the place to find out what's happening now and the events of today are leading to record engagement as evidenced by the mDAU growth and the surge in app downloads.

According to both Apptopia and Sensor Tower, Twitter had record app downloads worldwide during early June. Apptopia placed the peak at 677K on June 3 and Sensor Tower had the peak at 1 million downloads on June 2.

The numbers are very supportive of Twitter setting new mDAU user records in Q2. The company had 166 million mDAUs in Q1 and 30% growth in Q2 leads to the potential for reaching 175 million. A similar 14 million sequential mDAU increase would actually push the metric to a new high of 180 million.

Deep Value

The problem facing Twitter is that revenue growth doesn't match the surging users. Even before the virus crisis, the company saw Q4 revenue growth of only 11% while users surged 21%.

Due to a lack of events so important to ad revenues, analysts forecast revenues dipping over 17% in Q2. The restart of the PGA Tour should start helping with ad revenues, but investors should expect Twitter to eventually return to leveraging user growth to excessively revenue growth.

With the stock trading at only $33, Twitter is still far below the lows of February despite the surging engagement. Facebook and Snap (SNAP) recently hit a new 52-week highs while Twitter is nearly $13 or 28% below the high at $46.

Due to the weakness in Twitter, the stock now trades at the lowest forward EV/S multiple. All of the stocks were bunched up during the market lows in March, but now Snap trades at nearly double the 5.4x multiple of Twitter.

Data by YCharts

In Q1, Snap only had user growth of 20% to 229 million DAUs. Twitter is actually growing faster and no reason exists to think Snapchat drew in more users during the events of the quarter.

Snap has the faster revenue growth helped by the company being smaller than Twitter and not reliant on event related revenues. The return of the PGA this weekend and other sports should help with ad revenues, but the company should do a far better job of monetizing the higher engagement going forward.

Revenue growth matching the 25+% user growth would actually lead to 2020 sales of $4.3 billion versus the $3.3 billion estimates. The stock would be far cheaper with these higher revenues as opposed to the estimates for revenues of only $4.0 billion next year. The company beating these estimates will boost the stock.

The big story is that the social media site has again proven the value of the service during the COVID-19 outbreak and the protests. Twitter is now the unofficial go to site for news on current events. The only question is whether the company can monetize users.

Takeaway

The key investor takeaway is that Twitter remains the land of opportunity for shareholders. The stock is now the cheapest in the social media space despite having the fastest user growth. Investors must look past some of the short-term revenue issues and look towards where revenues can head in more normalized times.

Analyst’s 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.

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.