Altogether, this makes it too compelling to be ignored for long. Investors need to consider this name. Here’s why:
Healthy User Growth
Twitter reported a strong increase in mDAU (monetizable daily active users), up 21% compared with the same period a year ago. This was the strongest jump in mDAUs over the past eight quarters. This helped revenues increase by 11% year-over-year. Looking ahead, Twitter is guiding for Q1 2020 to be up 8% compared with the same period a year ago.
Twitter’s revenue growth rate is not the fastest, particularly compared with other social media platforms. Nonetheless, at this stage its shareholders are so used to receiving negative news from Twitter regarding its growth prospects that any semblance of stable growth is welcome news for investors.
Expenses Continue to Increase
As a reminder, Twitter’s Q3 2019 results had been weighed down by Twitter’s bugs affecting advertisers' ability to measure ad engagement.
Thus, when Twitter’s operating income margin compressed to 15% of revenue compared with 23% in Q4 2018, investors were more than content to offer the company a wide pass on these mixed results. Reasons cited for higher expenses included headcount increases and other investments to support growth.
Asides from the above-mentioned expenses, Twitter is expecting to see its capital expenditures rise by approximately 50% compared with 2019. The primary target of this increase in capital expenditure will go towards a new data center aimed at supporting additional audience and revenue growth -- this capital expenditure will be weighted towards the second half.
Long-Term Outlooks Improve
Twitter’s CFO Ned Segal believes that Twitter’s funnel for growth comes from getting users that have not been on the platform for a month or two, or even those who have never been on the platform, to rapidly onboard and start enjoying and engaging with topics of interest. Although significant work has already been deployed to this opportunity, Segal believes there is still more that can be done to attract users.
CEO Jack Dorsey (who is also the CEO of Square), adds that Twitter is different from other social media platforms, rather it is an "interest network." Helping users find out what’s happening at this moment around the world on a topic of interest is what distinguishes Twitter.
Dorsey notes that Twitter continues to make a strong push for users to be able to follow a topic of interest as easy as it is to follow an account. Going from onboarding to a richly-filled timeline populated with topics of interest needs to be frictionless if users are to return to Twitter on a daily basis.
Valuation - Large Margin of Safety
Twitter’s market cap of $29 billion is cheaply valued if it can continue to deliver high single digits to low teens percentage revenue growth rates.
Even though Twitter finished 2019 with free cash flow of approximately $770 million, a dip from approximately $850 million in 2018, Twitter’s balance sheet with approximately $4 billion of net cash affords Twitter plenty of maneuverability to re-establish itself as a healthy and growing platform.
Put another way, Twitter is trading at 38x trailing free cash flow, and less than this if we factor in its $4 billion of net cash. Moreover, we should note these are not earnings, but clean free cash flow.
The Bottom Line
Twitter’s strong increase in mDAU proves it continues to be viewed as a highly engaging platform. Furthermore, given that Twitter is able to successfully monetize its users as demonstrated by its U.S. advertising figures being up 20%, means it is just a matter of time for investors to recognize this compelling opportunity presented here.