4 Reasons to Buy Twitter Inc. Stock

Twitter's risk/reward ratio is much better now, and the stock price can appreciate in the near term.

Jun 13, 2014 at 10:48AM

Twitter (NYSE:TWTR) is trading more than 50% below its recent high of $74. The stock price implies a far more appealing risk/reward ratio, compared to a few months back. The company is adding users, and revenue growth is robust, even though engagement on the social media site has been weak. However, Twitter remains a very monetizable asset due to its scale and real-time nature. 

Altered expectations
When Twitter went public, the company had extremely high expectations, and there were numerous assumptions that Twitter would follow Facebook's (NASDAQ:FB) growth trajectory to become the next big thing in social media. However, the equity markets have realigned expectations about the company's role as a niche player in the social media space, subsequently resulting in the huge drop in share price. Twitter's timeline views per user declined on a year-over-year basis, prompting the sell-off. But investor have overlooked its excellent top-line growth and monetization opportunities outside its platform. 

Twitter's 255 million MAUs are a fraction of Facebook's 1.28 billion users, but the company is trying to roll out products that ramp up user growth and engagement. Twitter's platform is great for celebrities and media personalities, as they often engage extensively with followers and remain active. Twitter altered its webpages and made its interface larger and more attractive, and these initiatives might jump-start user engagement. As a result, Twitter has network effects, and its user engagement level can get a big boost if the company can devise more solutions. 

Revenue-per-user growth
Twitter is increasing is ARPU at a rapid pace, and the metric should increase every quarter as the company registers revenue growth north of 100%. As more ad budgets shift online, Twitter stands to gain from this secular shift. Twitter's trailing twelve-month ARPU at the end of 2013 stood at $2.93, and in the first quarter of 2014, this number stood at $3.35. In addition, Twitter has more revenue growth opportunities outside its social media platform through MoPub. 

MoPub, Twitter's mobile ad exchange, recently struck a two-year $230 million deal with Omnicom for selling mobile ad units built by Twitter. 

Growth in international
Twitter has a much larger total addressable market outside the U.S. and can gain a lot more users worldwide. Plus, Twitter's monetization on the international front also has substantial room for improvement. International users on Twitter's platform make up 78% of the company's total user base, but made up only 28% of total revenue in Q1 2014. Twitter has roughly 198 million international users and 57 million U.S. users but there are almost 3 billion worldwide Internet users. So Twitter has substantial room for growing its user penetration especially outside the U.S. 

Monetization from overseas can contribute a larger piece of Twitter's revenue pie in the future. In addition, eMarketer stated that it sees solid growth in Twitter's usage, stemming from emerging markets, notably in Asia. 


Source: eMarketer

Twitter is already operating-cash-flow-positive, and if the company can sustain its current revenue growth rates, it will start rolling out positive earnings per share in the next few quarters. In fact, sell-side analysts are modeling that Twitter will break even in the September quarter, and achieve $0.04 in EPS for the year. 

Margin expansion
Once the company fully expenses the IPO-related employee stock comp, Twitter's operating margins will improve substantially. Facebook, in the year of its IPO, saw significant margin contraction, only to see big increases in operating income margins within 1 year after the company started monetizing more effectively, and its IPO-related employee compensation had been fully expensed on its books. Twitter's financials are going through a temporary margin compression because of the IPO.  

Going forward
Twitter's risk/reward ratio is much better now, and the stock price can appreciate in the near term. Twitter's stock has clearly been oversold, and the company still has user growth potential outside the U.S. Twitter has a great monetization opportunity outside its own platform through its mobile ad exhcange, MoPub. The company's margins will ramp up and its share price will go higher.

Are you ready for this $14.4 trillion revolution?
Have you ever dreamed of traveling back in time and telling your younger self to invest in Apple? Or to load up on Amazon.com at its IPO, and then just keep holding? We haven't mastered time travel, but there is a way to get out ahead of the next big thing. The secret is to find a small-cap "pure-play" and then watch as the industry -- and your company -- enjoy those same explosive returns. Our team of equity analysts has identified one stock that's ready for stunning profits with the growth of a $14.4 TRILLION industry. You can't travel back in time, but you can set up your future. Click here for the whole story in our eye-opening report.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Facebook, and Twitter. The Motley Fool owns shares of Amazon.com, Apple, and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers