Social media companies have had a strong 12 months, in light of the stay-at-home economy driving more activity and engagement on their platforms. But times are changing and life is slowly returning to normal, so it's possible the strongest days are now temporarily behind some of these tech powerhouses. Twitter (TWTR) offered incredibly bullish guidance at the beginning of 2021, indicating plans to nearly double 2020's yearly revenue by the end of 2023 -- but its Q1 results sent the stock tumbling a short time later.
With that in mind, investors might be cautious heading into the Q2 result on July 22. With economic reopenings sending consumers back out into the physical economy, it seems ambitious to expect Twitter will revive the sluggish growth in some key metrics.
Image source: Getty Images
Investor optimism
Valuation is often a source of hot debate for technology companies. They can sometimes be difficult to put a price on, especially when their businesses are losing money. Very few turn a consistent profit like Facebook, which has proven its worth to both growth and value investors. That company trades at 30 times earnings per share and has grown revenue by double digits each of the last five years -- and investors have been rewarded with 200% share price growth during that time.
Twitter, on the other hand, lost $1.44 per share in 2020 and improved only marginally in Q1 2021, delivering $0.09 -- it was unable to build on a really strong 2019 despite the benefits of the stay-at-home economy. That hasn't stopped the share price from marching higher, now up 26% for the year, valuing the company at $55 billion. But as investors saw after the Q1 release, such gains evaporate quickly when the company fails to perform.
Twitter's goal of reaching $7.5 billion in yearly revenue by 2023 appears unlikely, given the figure grew just 7.4% in 2020 to $3.72 billion. In fact, growth has decelerated in each of the last three years, from 24.5% in 2018 to 13.7% in 2019.
In fact, to reach that lofty target it would need to add $1.27 billion in new revenue in each of the next three years -- or about $317 million per quarter. The $229 million added in the first quarter fell short of the mark.
Second-quarter expectations
According to Yahoo! Finance, analysts have an average earnings estimate of $0.07 for Q2, which would be a marginal contraction compared to the previous quarter. For the full-year 2021, Twitter is expected to deliver $0.79 per share, meaning the majority of the company's earnings should arrive in the second half.
The average Q2 revenue projection stands at $1.06 billion, which represents just 2.3% growth on the $1.036 billion generated in Q1. The company itself, however, expects Q2 revenue between $980 million and $1.08 billion, leaving a wide range that's void of significant growth potential over Q1.
Perhaps most notably, Twitter expects a Q2 operating loss of up to $170 million.
The company is experimenting with some new features, including Twitter Spaces, which allows users to have audio conversations in a setting similar to competitor Clubhouse. It's also tweaking the traditional platform experience, giving users more control over who can see their tweets, and the power to ''un-tag'' themselves from content. These additions will eventually be accretive to the company's earnings -- but likely not in the very short term.
Looking forward
User growth is the essence of the Twitter platform -- it's one of few things that can really boost revenue growth and earnings potential. The metric was up over 20% in each of the last six quarters on a year-over-year basis, although sequentially it's growing less than 5%, suggesting momentum might be slowing. This is something to watch, because a reacceleration would be really positive for the company's future outlook.
On April 29, Twitter shares traded at $65. Then the company released its Q1 earnings, triggering a 23% decline in the following weeks. The stock is about to crack $70 on broader market strength, and investors should be cautious that a similar thing might occur in the upcoming earnings report.
Overall, with only marginal profits and financial targets that might be in doubt, it could be relatively risky owning Twitter shares ahead of the Q2 result. For investors who like the company, it could be worth waiting and picking it up if we see another dip.
