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. 

Chart

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.

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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.

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