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This Week in the Stock Market: All Eyes on Twitter

Of all the headlines from the stock market last week, Facebook's (NASDAQ: FB  ) was probably the biggest. After reporting better than expected advertising revenue, the stock soared about 14% in the following two days of trading during the week. This week, all eyes are on Twitter (NYSE: TWTR  ) . The creator of the 140-character tweet reports its first quarterly results as a publicly traded company on Wednesday after the market closes.

Twitter headquarters. Image source: Twitter.

Can Twitter live up to euphoric hopes?
For the company's fourth-quarter results, analysts expect a loss of $0.39 per share on revenue of about $218 million. While these immediate expectations are certainly achievable, the Street's wildly bullish long-term outlook for the company looms over the stock.

Trading at $64.50, Twitter boasts a $35.8 billion market capitalization. That's about 150% higher than its IPO price of $26. While the business certainly qualifies as a growth stock, this social network's valuation looks a bit bubbly at the least. Twitter's price-to-sales ratio of 64.5 easily trumps Facebook's and LinkedIn's ratios of 23.4 and 17.9, respectively. And keep in mind that Facebook and LinkedIn aren't trading at a conservative valuation in relation to their business prospects by any means.

What should investors watch for?
Investors should watch for several things when Twitter reports earnings on Wednesday.

First, and foremost, Twitter will likely need to crush estimates to keep investors happy at current levels. With such a huge gain in an incredibly short time, underperformance during the quarter could spark a major sell-off as investors cash out with big gains.

If Twitter doesn't crush estimates, the only potential savior is probably robust guidance. For a growth company like Twitter, the valuation is based on future performance. And given that the company will be reporting its fourth-quarter and full year results, there's a good chance management will provide full-year guidance. Investors should hope for $1 billion-plus in expected 2014 global ad revenue, about in line with the analyst consensus for Twitter's 2014 revenue.

Finally, investors should hope for meaningful growth in the company's monthly active users. Twitter is a young start-up, and a slowdown in monthly active user growth could be a red flag. When Twitter went public, it said that as of the third quarter of 2013 it had 232 million monthly active users, up 6.4% sequentially. Investors should hope for at least another 6% gain, putting monthly active users at about 246 million.

A tough act to follow
Reporting after Facebook sets the stakes high for Twitter. The consensus estimate for $218 million in revenue is 94% higher than the year-ago quarter. While that's impressive, Facebook served up a big gain, too. The company posted 63% year-over-year top line growth in Q4 -- not bad, considering it trades far more conservatively than Twitter. Given Twitter's significant premium to sales over Facebook's, the social network should easily outperform Facebook to keep investors satisfied.

Can Twitter beat analyst estimates? Probably. But can Twitter live up to unspoken expectations built into a euphoric valuation? That's a tough question to answer.

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Daniel Sparks

Daniel is a senior technology specialist at The Motley Fool. To get the inside scoop on his coverage of technology companies, follow him on Twitter.

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8/27/2015 4:01 PM
TWTR $26.46 Up +1.43 +5.71%
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