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Here's Why Twitter Is Worth $65 a Share (Update 1)

Stocks in this article: TWTR GOOG

Updated from 9:17 a.m. to include additional information in the seventh paragraph.

NEW YORK (TheStreet) -- Twitter (TWTR) has been one of the most widely talked about stocks since the company's IPO in November. Now, Goldman Sachs is boosting its price target ahead of the company's first earnings report next month, noting there's been "significant acceleration" when it comes to innovation in the past quarter.

Goldman Sachs analyst Heath Terry raised his price target to $65 from $46, and reiterated his "buy" rating, noting almost four times the number of enhancements over the past quarter to drive user growth, engagement and an increase in monetization. "While certainly the result of prior development, we believe this accelerating pace is more indicative of the company's ongoing capabilities now that site stability issues have been resolved," Terry wrote in the note.

TWTR ChartTWTR data by YCharts

Twitter has certainly been a volatile stock since going public in November, reaching a high of $74.73 on Dec. 26, only to drop $10 the next day. Since that time, it's been on a roller coaster ride, with little for traders to go by, outside of information released in the company's S-1 filing. The company is set to report earnings on Feb. 5, giving investors their first look at Twitter's quarterly results since it became public.

Shares of Twitter were gaining in Monday trading, 3.2% to $58.81.

Analysts surveyed by Thomson Reuters are expecting a loss of 3 cents per share on $217 million in revenue for the fourth quarter.

Terry noted that Twitter launched 23 distinct product enhancements in the fourth quarter, with some involving direct messaging, TV trending, discovery, timelines and photos. While much has been made of Twitter's revenue concentration (about 80% of revenue comes from advertising), the company's ad products are still in their early stages and Terry believes a lot of the innovations surrounding keyword targeting, retargeting and broad match targeting will help boost monetization. As such, he boosted his revenue and EBITDA estimates from 2013 to 2015 by 10%, and 9%, respectively.

He now expects Twitter to generate $641.2 million in revenue in 2013, up from a prior view of $630.7 million. He also expects Twitter to have $1.23 billion in sales in 2014, and $2.5 billion in 2015. Adjusted EBITDA for those years are now expected to be $45.2 million, $136.6 million and $657.3 million, respectively.

"The enhancements include incremental improvements in existing ad products and targeting capabilities similar to the evolution of Google's adwords platform, improving usability and discoverability, scaling initiatives internationally, and potentially high impact products like retargeting and custom audiences," Terry wrote in his note. "These 4Q innovations follow the introduction of Twitter Cards in 3Q and TV initiatives like Amplify and TV ad targeting in 2Q."

Some of Twitter's recent product innovations have been focused on increased interaction, such as "direct access to direct messages (DMs) via the navigation bar at the bottom of the app," as well as sharing photos via DMs, something that could not be done before. There's also been a push toward multiple timelines, which would show trending TV shows and photos, new uses for Twitter as a news source (reading lists, related headlines) and the continued improvement of Twitter's search engine, which might be its most important feature, and could be why Google (GOOG) tried to acquire the company a few years ago.

Google ultimately wound up indexing Twitter's tweets into its search engine, but that deal fell apart, much to the chagrin of Internet users (including yours truly).

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