Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
In the run-up to Friday's key January employment report from the Labor Department, payroll processor ADP on Wednesday said in its own report that businesses added 175,000 jobs last month -- 10,000 shy of economists' forecast. That may explain why U.S. stocks opened lower, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (^DJI 0.23%) down 0.67% and 0.39%, respectively, at 10:15 a.m. EST. While month-to-month changes in employment mainly reflect cyclical factors, social networking companies Facebook (META 2.48%) and Twitter (TWTR) are riding a secular growth trend. Twitter will announce its first set of quarterly results as a public company after today's market close. Will its business demonstrate the same momentum that drove the superb results Facebook announced last week?
Wall Street is looking for a $0.02 loss per share on $217 million in revenue from Twitter, with the latter figure representing 94% year-on-year growth. A near-doubling in revenue sounds impressive enough, but note that Facebook achieved 63% quarterly revenue growth over the same period off a base that was 14 times the size of Twitter's (Facebook's fourth-quarter revenue was $2.6 billion). Still, it's altogether possible that Twitter's growth could tick up, rather than slow, over the coming quarter. As Wedbush Securities' Shyam Patil noted recently:
Our checks pointed to a very strong 4Q with rising average spend per campaign. Feedback suggests that Twitter is still an experimental part of budgets and generally gets bundled into a large package for social buys vs. Facebook, which is starting to get its own line item. There are some specific advertisers, however, who have a dedicated Twitter line item; in one case, we heard of a global marketer whose budget for Twitter is larger than that of Facebook. Our checks indicate the strong momentum has continued into 1Q and commentary suggests that Twitter budgets could at least double in 2014, as the advertising platform matures, new products (such as tailored audiences, Amplify) gain traction and analytics/measurability improve.
However, I'm not sure even an upside surprise to Wall Street's consensus estimates for the fourth quarter will be enough to lift the stock higher. My skepticism comes down to a metric on which Twitter has Facebook easily beaten: the valuation it currently commands from investors.
As of yesterday's close, Twitter's enterprise value (its market capitalization plus net debt) was nearly 37 times next 12 months' revenue estimate -- almost three times the multiple for Facebook (13.2)! At a $160 billion market value, Facebook is the 19th most valuable U.S. company -- this is an extraordinary achievement, if you consider it only celebrated its 10th anniversary yesterday. However, as a baseline, I don't consider Facebook to be cheap, so you can imagine my bewilderment as I try to make sense of Twitter's valuation.
Given the 150%-plus run-up in Twitter's stock price from its IPO, I have a hard time seeing how this afternoon's results will satisfy market expectations (although perhaps this is a failure of imagination on my part). Investors ought to be prepared for a share price decline, one that could be significant.