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Alex Cho
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The bird that keeps giving.
Twitter (TWTR) beat expectations on its Q1’19 earnings Monday, posting dil. EPS of $0.25 versus consensus expectations of $0.15. The social media giant grew revenue by 18% versus expectation of 16.6% for the quarter. Overall, the company posted revenue of $787 million, slightly beating consensus expectation of $775.23 million.
Twitter offered financial guidance for Q2’19 with revenue guided at $770 million to $830 million and operating income to be between $35 million and $70 million. Consensus analysts are anticipating Q2’19 revenue of $819 million, so the high-end of the guidance range also beat consensus estimates as well.
Twitter rallied following the earnings release, as investors had more modest expectations tied to financial results but were quickly surprised by a number of factors that had materialized during the earnings presentation.
The advertising narrative continued to improve, even as they disclosed that the cost per engagement fell, the overall increase in ad CPM purchases did have a positive effect on earnings. At least, according to Twitter, “Year-over-year growth accelerated in the US relative to Q4, with ad revenue up 26%. By product, video ad formats continued to show strength, notably from our Video Website Card and in-stream pre-roll ads.” Also, Twitter disclosed that international ad revenue grew by 10%. The sudden resurgence or strength from just U.S. advertising was more reassuring, as it dismissed concerns that advertisers would scale back spend on the platform due to advertising ROI.
Wedbush analyst Michael Pachter mentioned in a research note:
Profit upside was driven by the revenue outperformance, along with the shifting of certain expenses out of the quarter, and initial GAAP operating expense guidance that incorporated overly conservative assumptions. Ad engagements were up 23% y-o-y, compared with up 33% y-o-y last quarter, and up 69% y-o-y last year, while cost per engagement was down 4% y-o-y, compared with down 7% y-o-y last quarter, and down 28% y-o-y last year. Taken collectively, the ad pricing decline and impressions growth in Q1 suggests higher ROI for advertisers.
Another surprise from the quarterly earnings announcement was the growth in monetizable daily active users. Twitter reported monetizable daily active users of 126 million in Q4’18, which then grew to 134 million in Q1’19, representing 6.3% sequential growth in daily users from prior quarter. Twitter mentioned that it will no longer report monthly active users in their quarterly reports.
Morgan Stanley analyst Brian Nowak mentioned in a report following Twitter’s earnings report:
Adjusting our model, we increase our ‘19/’20 revenue by 1%/1% on faster user growth. We now forecast ad revenue to be up 18%/15% in ‘19/’20 (vs. our prior forecast of 17%/14%). Out increased top-line forecast (opex largely unchanged) translates to 4%/3% higher EBITDA in ’19/’20. Our $32 PT implies TWTR trades at 11.7x ’20 EBITDA, which is relatively in-line with the peer regression implied multiple.
While Nowak remains bearish on Twitter, or has concerns tied to the business multiple, analysts are looking towards the future, and adjusting model estimates higher following the company’s earnings report. Sustained revenue growth within the implied guidance range of 18% growth y/y will keep the stock grounded for the foreseeable future.
Bottom line
While the valuation could be subjectively debated, it’s worth noting that Twitter’s underlying business narrative is improving, as growth metrics did accelerate in Q1’19. Since Twitter is a growth stock, and advertising fundamentals seem stable or could accelerate beyond the guidance offered in Q2’19, we’ve finally reached an inflection point in the company’s history. Sure, it’s not going to be nearly as dominant as Facebook, but I think shareholders accept that fact, and would prefer a mature growth business that steadily grows revenue and earnings at a mid-teen pace. So as long as Twitter delivers on those expectations the valuation will continue to trend higher.
