After reporting better-than-expected earnings results, shares of Twitter (NYSE:TWTR) stock soared earlier this month. Shares of the little blue bird flew more than 16% higher the day after reporting earnings, and are still changing hands around the same price.
After such a pronounced move, shareholders may be wondering if it's time to sell and prospective buyers may be wondering if it's too late to get in. Let's take a look at Twitter's operations and find out what we can expect from the company going forward.
The biggest disappointment -- maybe the only disappointment -- from Twitter's fourth-quarter results was the slow user growth. The company added just 4 million net new users sequentially, ending the year with 288 million monthly active users. That number was deflated by an iOS update, which caused a drop in auto log-ins.
In the company's earnings release, management said the company expects absolute growth to return in Q1 to rates seen in the first three quarters of 2014 -- 13 million to 16 million. That implies that we'll see about 18% growth in the first quarter, and that growth may slow to around 16% by the third quarter. Twitter typically sees lower new user numbers in the fourth quarter, but it will be helped by an easy comparison to last quarter.
Monetizing timeline views
Last quarter, Twitter saw its first year-over-year increase in cost per ad engagement since going public. Ad prices increased 10% on the back of new formats as well as an increase in same format CPEs. This is a great sign for Twitter's future ad revenue growth, as the company indicates that it still has plans to increase supply systematically. With both forces -- supply and price -- working in its favor, Twitter could accelerate growth in ad revenue per-thousand timeline views.
Working against it, Twitter is coming up against some strong comps for the first two quarters. Last year, the Olympics and FIFA World Cup helped boost engagement and ad revenue in the first and second quarters, respectively.
Still, Twitter is expecting revenue to climb around 78% year over year this quarter. With approximately 18% user growth, Twitter's numbers imply a 51% increase in average revenue per user.
In the fourth quarter, Twitter posted a surprisingly high EBITDA margin. In fact, the 30% margin was higher than ideal, since it represents an inability for Twitter to reinvest earnings in the company as quickly as possible. To be sure, those earnings are getting reinvested now as Twitter seems to have accelerated its features rollout.
Going forward EBITDA margins should continue to climb year over year, but hopefully a bit more steadily than in the fourth quarter. Going forward, Twitter expects EBITDA margin to improve about five percentage points year over year each quarter. Notably, its long-term goal is 35% to 40%.
Putting it all together
Twitter's guidance of $2.3 billion to $2.35 billion in revenue looks awfully conservative. At its midpoint, that's 66% growth.
Accounting for 17% growth in users, 20% growth in ad load, and a 20% increase in ad price (or 30% supply growth and 10% price increase), ad revenue will climb approximately 68.5%, which is essentially right in line with what analysts are expecting. But if you factor in the potential growth from logged-out users and syndicated tweets, as well as increased adoption of MoPub with the help of Twitter's new Fabric software development kit, revenue will more likely climb to around $2.5 billion.
At an EBITDA margin of 24%, that puts EBITDA for the year just around $600 million on an adjusted basis. That's double what it produced in 2014, and significantly higher than Twitter's guidance of $550 million to $575 million.
Net income growth will be higher as increases in depreciation and amortization should be slower than 100%, but offset by a substantial increase in interest expenses from the company's third-quarter debt offering. Taxes will be negligible compared to interest, depreciation, and amortization. Analysts currently expect a 171% increase in earnings, and I see more upside to that estimate than downside.
Using my estimated $2.5 million revenue, Twitter trades for a P/S ratio of 12.1. Comparatively, Facebook trades for 12.4 times the consensus estimate for its 2015 revenue. Admittedly, this isn't a perfect comparison considering Facebook also has a track record of beating estimates. What's more, neither company really trades on valuation.
Still, considering the substantial upside compared to the company's internal projections as well as those of analysts, it looks like the stock could still move higher with positive surprises when it releases earnings results. Twitter stock could be a buy now.