Listen. We all knew the Twitter hype train would be at full steam when the company IPO’d back in November of 2013. With Facebook’s botched IPO, the media focus at the time was on Facebook’s declining user engagement, the departure of young people from the platform and questions on its ability to monetize mobile. Twitter was the darling company at the time with a more useful & relevant product. With all this hoopla, Twitter’s stock opened for trading on November 10, 2013 at $45.10, 73% higher than its IPO price of $26, which the big institutional investors got in at.
Regardless of the very real potential, I had no interest in buying in on a stock that was hyped to the levels Twitter was. The situation is very different today. With the repeated quarters of missed earnings, slow user growth (per social media standards) and lack of permanency at the CEO position, the sentiment has turned negative and the stock has corrected itself very nicely.
Once reaching a high of $73 a share, the stock is now trading in the mid twenties range. Looking back at the $45.10 opening price on its November 2013 IPO day, Twitter was valued at $24.6B, giving a Price to Sales ratio of 21.6X based on estimated 2014 sales of $1.14 Billion. Twitter’s current Price to Sales ratio based on today’s market cap of $18.6B divided by the estimated 2015 sales of $2.2B is around 8.5X, less than half of what it was on opening day.
In addition to the more attractive valuation today, here are several industry and product catalysts I believe can ignite a run in the stock price.
Certain Short & Medium Term Catalysts:
– Upcoming 12 months full of major events: NFL season starts soon, Olympics in Brazil are next June and the U.S. presidential election campaign is heating up. Twitter thrives on these major events to provide a lift in engagement and a boost in advertising revenue. This also aligns perfectly with its Project Lightning, which is designed around live events, and aligns with the major marketing push the Company has planned for later in the year.
– Wall Street expectations are low: After repeated quarters of missed earnings, it is safe to assume expectations on the street for the second half of 2015 will be low. This to a degree prevents a “shock miss” in earnings & user growth, and avoids the sharp stock drop that follows in those situations.
– Permanency at CEO and CMO: Not much to add here except it is only a matter of time that these positions will be filled with permanent hires.
Possible Short & Medium Term Catalysts:
– Monetization of Vine: Vine has over 100 Million monthly active users (MAUs). For comparison, this is almost a third of Twitter’s MAUs number, and Vine is growing at a faster pace. Possible strategies to monetize Vine include advertising(!) and introducing a buy button for music on the app
– Twitter Acquisition: The talk of a Twitter acquisition has been around for a while, and now with the sharp drop in stock price, Twitter becomes a more attractive acquisition target for Facebook or Google.
Without a doubt this stock is not without its risks, the rate of user growth the Company will be able to sustain being a key one. But as we speak today, Twitter certainly presents a much more compelling investment opportunity than it did on its IPO day.
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