Twitter (TWTR) has had a disappointing 2019.
Its stock hasn't gotten a lift like its tech peers despite demonstrated user growth, outsize demand for a recent bond offering, and an advertising market that's forecast to spend more on social media in the new year.
That lack of upward movement in one of the leading social media companies could very well provide a buying opportunity for investors as we head into the new year.
The stock is only up 6% year to date. In contrast, Facebook (META -0.54%) is up 48.7% over the same time frame. Twitter's shares have been trading around $30 ever since it reported third-quarter earnings results in late October.
The stock is getting close to the $26-a-share bottom it hit in January 2018. Shares were up 80% six months later. Two other times in 2018 Twitter stock dipped to around $25, only to increase from there, signaling it may soon be poised for a rebound.
Demand drives bond offering higher
But Twitter has more going for it than a bottoming stock. Investors are expressing confidence in the company, even in the face of challenges this year. It recently raised $700 million in a junk bond offering, with demand driving the offering size up by $100 million. The junk bonds, which come due in 2027 and mark Twitter's first foray into this type of debt raising, reportedly have yields of just $3.875%, down from the 4% originally expected.
That's low for a bond that is below investment grade. The new bonds received a BB+ rating from S&P Ratings.
"Our rating on Twitter reflects its unique position in real-time social networking, meaningful global scale, excellent brand recognition, engaged user base, and healthy adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization] margins in the mid- to high-30% area. Twitter's $5.8 billion cash balance and modest debt balances provide ample financial flexibility," S&P Ratings wrote in its report. S&P said the rating reflects its expectation Twitter will have revenue growth of 10% to 12% and solid operating performance during the next two years.
Dorsey's relocation to Africa doesn't spook debt investors
The strong interest in the Twitter debt offering came even though its CEO, Jack Dorsey, sparked controversy by announcing he plans to live in Africa for as much as six months out of the year. That didn't sit well with some investors, including Jeffrey Sonnenfeld from the Yale School of Management, who called it "reckless and egomaniacal" and Twitter's board "irresponsible and negligent." Others say it makes sense to keep a pulse on Africa, which is expected to be the next bastion of growth for payments (Dorsey is also CEO of mobile payments company Square).
The demand for Twitter's debt offering is also coming off a third quarter in which advertising revenue of $702 million was well short of the $756 million Wall Street was expecting. Management blamed the shortfall on issues with its Mobile Application Promotion product, which prevented it from targeting ads and sharing data with advertising customers. Shares tanked on that news, whether or not it was justified. Twitter is fixing that problem, which should lift advertising sales further.
The social media operator also decided to no longer allow political ads on its platform. That effectively shuts out what could be a lot of ad sales in the run-up to the 2020 U.S. presidential election.
Despite all that, investors clamored to get in on Twitter's bond offering, signaling there's confidence in its prospects and its stock, at least for the next two years.
Twitter to benefit from an increase in ad spending
It's not just debt investors who expect prosperous times ahead for Twitter. Some Wall Street watchers are also praising its prospects for a few reasons.
Take global advertising for starters. Social media is expected to get a bigger share of companies' advertising dollars in 2020, with Facebook and Twitter among the direct beneficiaries of that increase. Sure, Snap's SnapChat and ByteDance's TikTok are getting a lot of attention and user growth, but Facebook and Twitter are still the U.S. social media powerhouses.
Earlier this month, Bank of America predicted digital advertising revenue will increase by 15% in 2020, with some $341 billion spent in advertising once 2020 is complete. Bank of America thinks both will be winners, predicting Twitter could be a standout as its user base continues to grow. Bank of America has a $39 price target on shares of Twitter, implying a 34% upside.
Twitter may not give investors much of a gift as we close out 2019, but with advertising spending poised to increase and with its user base growing and marketing platform problems under control, patient investors may be rewarded in 2020 for owning shares of Twitter.