Twitter Is Still Too Expensive

Dwindling user growth, and page views are key signs that Twitter is still trading at extremely high price multiples. Twitter's stock price should see further corrections.

Ishfaque Faruk
Ishfaque Faruk
Apr 7, 2014 at 11:05AM
Technology and Telecom

The high-flying stock price of Twitter (NYSE:TWTR) has come down substantially from its highs in the 70s. The company's weak user and usage metrics in the last quarter have scared many investors off. In short, the company was, and is, simply too expensive.

Metrics are decelerating
Twitter's user base increased 30% year-over-year to 241 million users. The company is still a mobile monetization story as 76% of its total monthly active users come from mobile devices which amounts to 184 million users. 

Twitter's user engagement as measured by Timeline Views was 148 billion at the end of 2013, which was a sequential decline of 7% from 159 billion views from the prior quarter. The decline in Timeline views took place not only in the U.S. but in its International segment as well. This was the first time in the last eight quarters that the company saw its time-line views decline, either. 

International users are a lot less engaged on Twitter and spend a lot less time on its platform. Since international users make up 78% of total users on Twitter, lower usage can have material negative impacts on the company's financials. However, the company earns most of its revenues from the U.S. as only 27% of its total revenues flow in from outside the country.  

Revenue and fundamentals
In the last quarter, Twitter's topline revenues surged 116% year-over-year to $243 million. The company's advertising revenues in the last quarter increased 121% to $220 million driven by higher pricing for its ad products. Advertising revenue per thousand timeline views increased to $1.49 a healthy increase from the prior quarter when it stood at $0.97. The company remains a mobile-centric company as mobile advertising revenues make up more than 75% of total ad revenues. 

Twitter's data and licensing business grew 80% year-over-year to $23 million in the last quarter. The company clocked a large net loss in the last quarter, as a substantial portion of its stock-compensation was recorded in its financials due to the IPO. The company's GAAP net loss stood at $511 million, and this net loss position should change course as the company will record lower equity compensation expenses going forward. 

Future prospects
The company's real-time and conversational nature can lead to more monetization prospects. Twitter's CEO stated that the company is engaged in a number of initiatives to harness future growth. Twitter ended 2013 with $2.2 billion in cash, so the company can pursue more mergers and acquisitions to expedite its growth like its social media counterpart, Facebook (NASDAQ:FB).

Facebook made two big acquisitions in 2014: WhatsApp and Oculus Rift. These two acquisitions will likely aid Facebook's long-term revenue growth, even though neither will produce much in revenues in the near term.  

Twitter acquired MoPub, a mobile-focused ad exchange, for $350 million in 2013 to help grow its mobile revenues even more. After the IPO, Twitter had more than $2.2 billion of cash in its balance sheet and this should help the company pursue strategic M&A deals in the future. 

In addition, Twitter recently launched a newer array of ad products to drive more value to advertisers. Ad products such as TV conservation targeting, tailored audiences, conversion tracking, and other services might encourage companies to increase their ad spending on Twitter while simultaneously appealing to newer types of marketers.

Going forward
Twitter had good revenues in the last quarter, and the company laid out 2014 revenues estimates to be within $1.15-$1.20 billion. The lower-end of that guidance assumes that the company will grow 73% year-over-year. While that is a great top-line growth number, the company still trades at a valuation that is sky-high. The company's market cap of $26 billion suggests that the company is trading a very demanding Price/Sales multiple of 23 times its expected sales for 2014.

Twitter's dwindling user growth and time-line views shows that users are not using the service as much. Lower levels of usage will negatively impact the company's revenue generation capabilities substantially. The company's data licensing business will be flat in 2014, however, as Twitter focuses on growing its ad business. Twitter's stock saw a big correction recently, and investors should wait for further price correction in the company's overvalued share price.