Twitter earnings likely boosted by ad rebound but Trump ban may weigh – Stock Market News

Raffi Boyadjian, XM Investment Research Desk

Twitter will be the last of the major techs to report its earnings on Tuesday, after the market close. The social media giant is expected to enjoy another quarter of improving revenue after advertising sales were hammered at the onset of the pandemic. The addition of new features and enhancements to the Twitter platform probably contributed to higher user engagement. The company has also been at the forefront of tackling online abuse and fake news, most notably when it suspended the former President Donald Trump’s account after the US Capitol riots. However, Twitter’s get tough policy may not be entirely good news for earnings as it’s at risk of alienating some of its users.

Ad revenue expected to jump after pandemic slump

While the pandemic was a boon for many digital enterprises that enjoyed a surge in demand from the stay-at-home revolution, companies that are overly reliant on online advertising for their revenue stream suffered a huge dip in sales when many businesses were forced to shut down during the Spring 2020 lockdowns. Twitter’s advertising income plunged by 22.7% year-on-year in Q2, with the drop in total revenue not being much far off (-18.8%), highlighting how small the company’s earnings are from non-advertising sources.

Earnings rebounded sharply in Q3 and that trend is forecast to have continued into Q4. According to analyst estimates by Refinitiv IBES, ad revenue is projected to have increased 19.1% y/y to $1.05 billion in the fourth quarter, with total revenue jumping 18.5% to $1.19 billion. Earnings per share (EPS) is expected to have risen 26.5% y/y to $0.32 from $0.19 in the prior quarter.

Slow progress with monetization plans

The company has been seeking to diversify its income stream for some time now but most of its efforts to monetize its user base still evolve around advertising. But that may not be such a bad thing right now as the digital advertising market is in the midst of strong growth as more and more firms switch to doing business online. The plethora of monetary and fiscal stimulus globally is not only boosting consumption but also supporting traditional businesses to adapt to the online world. In the meantime, the return of live events (even if they are without spectators and audiences or organized entirely remotely) is increasing traffic and user engagement on the platform. For Twitter, all this can only mean more money being spent on online ads and sponsorships.

The challenge of tackling hate speech

The US presidential election in November was one of the biggest events in Q4 but it is unclear how much of a boost it was for earnings as some advertisers may have boycotted the political highlight of the year so as not to associate themselves with extremist views. Accusations that social media companies are fuelling hate speech led Twitter to ban political ads in 2019 and are probably what compelled it to permanently suspend Trump’s account in January for allegedly inciting violence.

The long-running battle to moderate abusive content or misinformation on social media platforms has not only been pushing up expenses for these companies but disenchanted users may be abandoning them for censoring free speech. Trump had more than 88 million followers and it’s possible many of them deserted the platform following the ban. Hence, investors are eagerly waiting to see what Twitter’s latest user numbers or ‘monetizable daily active users’ (mDAU) as the company would like to call them are.

User growth in the spotlight

In the previous quarter, weaker-than-anticipated growth in mDAU sent the stock plummeting despite a huge earnings beat and there is a danger the same can happen again with the Q4 results. Another worry for investors apart from disappointing user growth is rising investment costs. The company has been on an acquisition spree lately, buying up several startups. But unless investors start to see some evidence that the integration of these new technologies into Twitter are starting to generate higher revenue, they may decide to dump the stock.

On balance, however, Twitter seems to be moving in the right direction. Its recent measures to minimize the spread of hateful content are more likely increasing trustworthiness among its users than not and reducing the risk of the company getting caught in political crossfires again in the future. CEO Jack Dorsey could also be finally making good on his pledge to develop a paid subscription model with the recent acquisition of the editorial newsletter platform Revue.

Overvalued or a buying opportunity?

Nevertheless, with a negative trailing price/earnings (PE) ratio, the company is relatively overvalued compared to its bigger rivals like Facebook and Alphabet (Google). It fares slightly better when looking at the 12-month forward multiples, which at 62.8 (as of February 8) is far higher than Facebook’s (23.2) and Alphabet’s (29.6) but significantly below its smaller competitors such as Snap (306.4) and Pinterest (105.9).

As a result, analysts are maintaining their ‘hold’ recommendation for Twitter, assigning a median price target of $49.00. That’s somewhat below the current share price, which has surged back above $50 after the Trump ban-induced selloff in January. The stock appears to have hit a wall around the 123.6% Fibonacci extension of the December-January downleg at $58.87. Clearing this hurdle could set the bulls on course for the 161.8% Fibonacci of $63.35.

To the downside, the $53.60 is a key support area to watch should the stock go on the retreat again. Steeper losses are likely to bring the 50-day moving average into scope at $50.93 currently.

Before the latest rally, Twitter stock had one of the worst starts to the year among S&P 500 constituents and despite a stellar 2020, the share price has yet to surpass its all-time peak of $74.73 achieved soon after its IPO in 2013. If Dorsey lays out the right strategy in the earnings call and online ads continue to boom, 2021 may be the year that Twitter stock finally climbs to a new record.