Twitter Stock (NYSE:TWTR) has fallen over 30 percent year to date and investors are beginning to panic. Rightfully so, considering the company has been the focus of negative media attention over the past two weeks due to the exit of four key executives, an impending earnings report, and rumors that it will change its homepage algorithm. Here’s a closer look at how each of these events is impacting Twitter shares, and how analysts are responding.
On January 24, CEO Jack Dorsey announced that four executives had “chosen to leave” Twitter. The four ex-executives all played integral roles in Twitter’s product, engineering, media, human resources departments. Media sources speculated that the executives were forced out by Dorsey in an effort to revamp the company, but Dorsey’s tweet expressed nothing but goodwill for his parting teammates.
Twitter’s COO Adam Bain and CTO Adam Messinger are taking on additional roles to fill the void in the interim, worrying investors that the company’s ambitious turnaround efforts may take longer to put in to drive as the C-suite becomes overloaded. The company has not yet announced permanent replacements for the vacant positions, though the company has invested in a new diversity chief as it attempts to diversify its workforce.
Furthermore, investors worry that Dorsey may be stretched too thin as he continues to serve as CEO of both Twitter and Square (NYSE:SQ). Being at the helm of two publicly traded companies is no small feat, and critics are calling for him to resign from Square to focus all efforts on restoring Twitter to its former glory. For now, Dorsey is known for his tightly compartmentalized schedule, spending his mornings at Twitter and afternoons at Square. Thankfully, the headquarters for each are in the same San Francisco neighborhood.
Twitter will post Q4 earnings on Wednesday after market close. Analysts estimate the social media giant will post revenue of $710 million and Non-GAAP EPS of $0.12. In the same quarter of last year, the company posted revenue of $479 million and Non-GAAP EPS of $0.12. For this quarter, Twitter guided revenue between $695 million to $710 million. Mark Mahaney of RBC Capital is expecting the company to post revenue of $713 million and Non-GAAP EPS of $0.13. The analyst reminds that “TWTR has exceeded its revenue guide 5/6 quarters,” and “the high end of revenue guidance implies 48% Y/Y growth, a deceleration vs. Q3’s 58%.”
Aside from revenue and EPS figures, decelerating user growth will come under scrutiny in the company’s earnings report. Analysts can’t help but compare Twitter to the likes of Facebook, which has managed to keep up impressive levels of user growth. Twitter, on the other hand, has struggled to grow its user base at the same competitive rate. Mahaney, among other analysts, will also be checking if Twitter’s efforts to monetize on logged-out users with Promoted Tweets has bared any fruit. However, the analyst doubts this action will have a material impact at this point.
According to TipRanks, Mark Mahaney has a 52% success rate recommending stocks with a +14.5% average return per rating.
Potential algorithm change
Since BuzzFeed broke the news that Twitter’s chronological timeline of tweets may be disrupted as soon as this week, media headlines have ranged from blasting the change to denying it altogether. The frenzy gave way to the trending hashtag, #RIPTwitter.
With the alleged algorithm change, Twitter users would see the most relevant tweets first, as opposed to the most recent. Dorsey was quick to clarify the algorithm change report, tweeting, “We never planned to reorder timelines next week.” This was a swift response to the public outcry that denounced the company changing one of the pillars of Twitter’s product.
Twitter has tested the change in a small group of users, but the jury is still out on how, or if, the change will be implemented. One can expect to receive clarification on the matter during the conference call after earnings.
Time to buy?
Although some say it’s best to buy on the dip, Mahaney is maintaining a Sector Perform rating on Twitter with a $34 price target based on two concerns. First, he remains unsure when or if Twitter’s product changes “can stabilize or reaccelerate User & Usage metrics,” since Moments, the company’s most recent product change, likely didn’t have a strong impact.
Second, Mahaney explains, “Channel checks and our recent surveys don’t provide convincing evidence that a substantial number of advertisers will commit meaningful [budget] to TWTR.” Consequently, Twitter lags behind Google and Facebook in content and news efforts and this competition “will eventually limit TWTR’s growth potential.” The analyst acknowledges that these bearish points warrant a Sell rating, but he views Twitter’s “valuation… as very reasonable for what remains a very sizable platform,” leading him to his Sector Perform rating.
Hopefully, this week’s earnings report and further clarification on Twitter’s efforts to revamp its product will shed light on the future of the company. Until then, investors are divided on the stock. According to TipRanks, 9 analysts recommend buying the stock, 3 urge to sell it, while 7 remain neutral.