Elon Musk -- who has been notoriously controversial on social media -- bought a 9.2% stake in Twitter (TWTR) in early April, making him the company's largest shareholder. Needless to say, the news of Musk's purchase sent Twitter's stock skyrocketing, with shares of the popular social media firm soaring above 20% early in the day. A stake less than 10% is considered passive, but many investors are convinced that Musk plans to change the landscape of the company's operations in one way or another. After all, the Tesla CEO has been a longtime critic of Twitter and has even gone as far as to claim he was considering building his own social media platform.
To take it one step further, Musk offered to buy Twitter for $41.4 billion on April 14th. The bid values the social media company at $54.20/share, equal to a 38% premium over Twitter's closing price on April 1st. Even after receiving a nice boost from the recent news, Twitter shares are still down 35% this past year compared to the S&P 500, which is up 8%. The Elon Musk headlines are exciting, but they shouldn't be the reason you decide to invest in Twitter today. On that note, let's examine the company in more detail to help us determine if it's worth our capital moving forward.
A look into the fundamentals
Twitter's financial statements have been on a bumpy ride. Going from a positive bottom line in 2018 and 2019 to negative earnings the past two years, the company has yet to prove that it can consistently achieve profitability, according to generally accepted accounting principles (GAAP). GAAP earnings represent a company's true net profit after all expenses, whereas non-GAAP earnings -- which are commonly used on Wall Street -- exclude "one-time" transactions.
Twitter reported revenue and non-GAAP earnings of $5.1 billion and $0.20/share in 2021, translating to 37% and 123% growth year over year, respectively. Sales growth over the past five years has been relatively solid, with the company growing its top line at a compound annual growth rate of 15%. Management is guiding for low- to mid-20% range revenue growth in fiscal year 2022. Advertising revenue -- which drives Twitter's business -- climbed 40% year over year, up to $4.5 billion. Provided its $6.4 billion of cash and short-term securities and debt-to-equity ratio of only 76%, Twitter's balance sheet is in good health.
Looking ahead, Wall Street is forecasting a year of improvement for the social media enterprise. Analysts are modeling a top-line and non-GAAP EPS of $6.0 billion and $0.80, indicating 18% and 300% growth year over year, respectively. Although question marks surrounding Twitter's growth and bottom line remain, the company is showing signs of progress. Continuing to find ways to effectively monetize its user base will be key to Twitter's success in future years.
How about valuation?
Twitter's valuation has normalized amid its latest pullback. The company pegs a price-to-sales ratio of 7.4 today, which is lower than its five-year average of 8.3. Back in April 2021, Twitter was trading at 14 times sales, meaning its current multiple is nearly two times lower than it was a year ago. That said, the company's valuation is certainly looking more attractive than beforehand, especially given the strides it has recently made on the operational front.
Twitter's price-to-sales multiple also looks reasonable relative to its industry counterparts. Although the company's valuation appears more expensive than competitors like Meta Platforms and Bumble, Twitter seems to be trading at a discount to other peers like Snap and Match Group. Overall, Twitter seems to be reasonably priced, both on a historical and peer group basis.
My final verdict
I'm going to let the Elon Musk news simmer down before I consider buying shares of Twitter. The company's fundamentals -- although historically shaky -- look to be heading in the right direction. Likewise, its valuation has shrunk to more reasonable levels, which surely makes the stock more attractive than before.
I'll remain on the sidelines for now, as I'm not completely sold on Twitter just yet. I plan to let the next couple of quarters play out before seriously considering a stake in the company. Let me make one point clear, though -- don't let Elon musk be the reason you start a position in Twitter today. Do your own due diligence, and make sure you focus on fundamentals and valuation when deciding whether or not to buy the stock.