Is Twitter Stock A Buy Or Sell After Recent Earnings? (TWTR) (2024)

Elevator Pitch

I deem Twitter Inc's (TWTR) shares to be worthy of a Hold rating.

Twitter's Q4 2021 earnings failed to meet market expectations, and the recent set of results didn't give the market sufficient confidence that the company will succeed in achieving its 2023 revenue and user growth targets. TWTR's valuations are also not particularly appealing based on a peer comparison. On the flip side, Twitter performed well on certain metrics such as new daily sign-ups and the relative growth in direct response advertising vis-a-vis brand advertising in the recent quarter. Taking into account all these factors discussed here, I decided that a Hold investment rating was appropriate for TWTR's shares.

How Were Twitter Earnings?

Twitter issued the company's Q4 2021 earnings press release on February 10, 2022 before trading hours, and TWTR shares declined by -2% to close at $37.08 on the same day as its quarterly results fell short of market expectations.

TWTR's top line expanded by +22% YoY from $1,289 million in Q4 2020 to $1,567 million in Q4 2021. Both the company's domestic and foreign business operations performed well in the most recent quarter. Revenue for Twitter's US market increased by +21% YoY to $885 million in the fourth quarter of 2021, while sales for TWTR's international markets grew by +23% YoY to $682 million over the same period. If adjusted for foreign exchange effects, Twitter's revenue derived from international markets would have increased by an even better +26% YoY.

But the company's total revenue for Q4 2021 still came in -0.4% below what Wall Street analysts had been forecasting. There were two key reasons for Twitter's slight revenue miss.

Firstly, TWTR disclosed at the company's Q4 2021 earnings call that it "didn't maintain the same pace (of revenue growth) in the last couple of weeks of the quarter" as compared to the "strength that we saw at the beginning of the holiday season in the U.S." In other words, there was a sharper-than-expected revenue slow down towards the end of last year.

Secondly, US dollar strength had a larger-than-expected negative impact on Twitter's foreign revenue. As I highlighted earlier, TWTR's headline revenue growth for international markets was lower than the increase in its revenue on a constant-currency basis.

Twitter's non-GAAP adjusted earnings per share decreased by -14% YoY from $0.38 in Q4 2020 to $0.33 in Q4 2021, and this was also -3% lower vis-a-vis the sell-side's consensus bottom line estimate of $0.34 per share.

The substantial increase in operating expenses in the recent quarter resulted in TWTR's weaker profitability on a YoY basis and its earnings miss. Twitter's research & development and sales & marketing expenses jumped by +50% and +41% YoY to $257 million and $309 million, respectively in Q4 2021.

Instead of just analyzing the headline financial numbers, I also look at Twitter's key operating metrics in the subsequent section.

TWTR Stock Key Metrics

Twitter's fourth-quarter user metrics were decent, notwithstanding the fact that the company's top line and bottom line did not beat market expectations.

TWTR's global Monetizable Daily Active Usage or mDAU increased by +13% YoY and +3% QoQ to 217 million as of end-Q4 2021. The company defines mDAU as "people, organizations, or other accounts who logged in or were otherwise authenticated and accessed Twitter on any given day" in its Q4 2021 shareholder letter.

Twitter also revealed at its recent quarterly investor call that daily new accounts created/existing account reactivations and sign-ups grew by +25% and +35%, respectively on a YoY basis in Q4 2021.

The company attributed the excellent user metrics seen in the fourth quarter of this year to the introduction of the new single sign-on feature. At its recent earnings briefing, Twitter highlighted that single sign-on has helped to "remove friction for people as they sign up" as they "don't have to remember or create a new password."

But it is noteworthy that Twitter only increased its full-year 2021 mDAU by +13% (same as that for the fourth quarter), which is much lower than the mDAU CAGR implied by the company's 2023 targets which I detail in the next section.

Is Twitter Stock A Good Long-Term Investment?

These two years, 2022 and 2023, will be critical for Twitter, as the company has to deliver on its 2023 goals to prove to the market that it is a good long-term investment. This in turn depends on TWTR's success in creating a more balanced advertising mix in its favor.

At its Analyst Day in February 2021, Twitter set a target of achieving 315 million in mDAU by end-2023 and $7.5 billion of revenue in 2023 at the very least by "executing on our revenue product roadmap" and "gaining market share in both brand and direct response." This translates into a two-year revenue CAGR of +21.5% and a two-year mDAU CAGR of +20.5%.

A key driver for Twitter to reach $7.5 billion in revenue by 2023 is the optimization of the company's mix between direct response advertising and brand advertising. The excerpt from Twitter's 2021 Analyst Day presented below illustrates that TWTR's current mix between direct response advertising and brand advertising is sub-optimal, with the company having a relatively low (15%) exposure to the faster-growing direct response advertising segment.

Excerpt From Twitter's 2021 Analyst Day Presentation Touching On Advertising Mix

It is encouraging that Twitter observed direct response advertising achieving faster growth than brand advertising in the recent fourth quarter as per the company management's comments at the recent earnings call. This suggests that TWTR is gradually moving towards its goal of having an even split between direct response advertising and brand advertising.

Unfortunately, the investor community seems to be unconvinced that Twitter will be able to hit its 2023 targets. As an illustration, the current sell-side analysts' consensus revenue forecast for TWTR in 2023 is $7,363 million as per S&P Capital IQ data, which is 2% below the company's $7.5 billion top line goal. It is understandable that sell-side analysts are cautious when it comes to forecasting the company's future revenue growth. It is quite a stretch to increase the contribution of direct response advertising as a percentage of total advertising revenue from 15% to 50%, and there is also significant competition between Twitter and other rivals for digital advertising dollars in general.

TWTR's 2021 mDAU growth of +13% was significantly below the +20.5% CAGR implied by its 2023 mDAU target of 315 million, while Wall Street analysts don't think the company can grow its top line as fast as it guided for in the next two years.

If Twitter can't even be successful in attaining these intermediate term goals, it is much harder to have confidence in TWTR's long-term growth prospects. In a nutshell, Twitter has yet to prove to the market that it is an attractive long-term investment.

Is TWTR Stock A Buy, Sell, Or Hold?

TWTR stock is a Hold.

Twitter is moving in the right direction by optimizing its advertising mix, and setting ambitious user and revenue targets. But it could be challenging for TWTR to meet these specific 2023 targets as I explained in the preceding section.

Peer Valuation Comparison For Twitter

At the same time, Twitter's valuations aren't exactly compelling. As per the table presented above, TWTR is valued by the market at a significant premium to its peers on the basis of forward EV/EBITDA multiples. Although Twitter does boast superior revenue growth prospects on a relative basis, its EBITDA margins are much lower than its peers.

In conclusion, Twitter is a Hold after recent earnings.