Leading public self-expression and conversation platform Twitter, Inc. (TWTR), which is based in San Francisco, has been struggling with Apple Inc.’s (AAPL) advertisement-tracking privacy changes to its devices for the past few months. The policy change may not bode for TWTR, impacting its advertising revenue. Loop Capital Markets analysts Rob Sanderson and Alan Gould recently slashed their TWTR price target to $65 from $84. However, the 2022 Winter Olympics and the World cup are expected to boost the company.

TWTR shares have slumped 20.2% in price over the past year and 37.2% over the past six months. The stock is trading below its 50-day and 200-day moving averages, near its 52-week low. Over the past five days, the stock has slumped 2.1% to close its last trading session at $42.66. Furthermore, the stock plunged after the company’s disappointing user growth in the third quarter. TWTR’s total monetizable daily users (mDAUs) increased to 211 million, falling short of analysts’ expectations, while the company’s user base grew less than 3% year-over-year. KeyBanc Capital Markets said, “Twitter needs to materially reaccelerate U.S. and international growth” to meet its stated goal of 315 mDAUs by the end of 2023. Many analysts lowered their price targets following the release.

Jack Dorsey, Chief Executive Officer, stepped down from the company in November, and Parag Agrawal was appointed as the new CEO. “There are no changes to the company’s previously shared outlook for the fourth quarter and full-year 2021, or its 2023 goals,” TWTR stated following the executive change, indicating that no immediate improvements or key changes can be expected in the next few quarters. In addition, increased scrutiny and regulations globally and uncertainty concerning the iOS changes could be challenging for TWTR.

Here is what could shape TWTR’s performance in the near term:

Stretched Valuation

TWTR’s 189.35 non-GAAP forward P/E ratio is 932.4% higher than the industry average of 18.34. In terms of forward EV/Sales, TWTR is currently trading at 6.40x, which is 155.9% higher than the 2.50x industry average. Also, its 6.70x forward Price/Sales is 277.8% higher than the 1.77x industry average.

Weak Bottom Line

TWTR’s revenues increased 37.1% year-over-year to $1.28 billion in its fiscal third quarter, ended Sept. 30. However, the company’s income from operations came in at a negative $742.55 million, down 1,423.4% year-over-year. Its net income declined 1,972.9% from its year-ago value to a negative $536.76 million. The company’s EPS came in at a negative $0.54, missing the consensus estimate by 460%.

Mixed Profitability

TWTR’s 64.26% gross profit margin is 24.4% higher than the 51.66% industry average. Also, its 17.60% levered FCF margin is 54.4% higher than the industry 11.40% average.

However, TWTR’s 2.42% and 1.24% respective ROE and ROA compare with the 9.85% and 3.00% industry averages. Also, its 1.80%  ROTC  is 60.7% lower than the industry average.

POWR Ratings Reflect Uncertainty

TWTR has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of C for Quality, consistent with its mixed profitability.

TWTR also has a C grade for Growth. This is justified because the company’s top-line growth did not translate to bottom-line improvement in its last reported quarter.

Of 77 stocks in the Internet industry, TWTR is ranked #43.

Beyond what I have stated above, one can also view TWTR’s grades for Value, Sentiment, Momentum, and Stability here.

View the top-rated stocks in the Internet industry here.

Bottom Line

TWTR reported a net loss in its most recent quarter and missed its EPS consensus estimate by a large margin. Furthermore, the Street expects its EPS to decline 7.9% year-over-year in the quarter ending December 2021, and its negative ROE is worrisome. The company closed the sale of MoPub to AppLovin Corporation (APP) for $1.05 billion in cash on January 1. However, the $200 million – $250 million revenue losses associated with the deal are not expected to be recouped. Also, considering the lofty valuation matrices, it could be wise to wait for a better entry point in the stock.

How Does Twitter, Inc. (TWTR) Stack Up Against its Peers?

While TWTR has an overall POWR Rating of C, one might want to consider looking at its industry peers, Travelzoo (TZOO), with an A (Strong Buy) rating, and Yelp Inc. (YELP), Alphabet Inc. (GOOGL) with a B(Buy) rating.

TWTR shares were trading at $40.81 per share on Tuesday morning, down $1.85 (-4.34%). Year-to-date, TWTR has declined -5.58%, versus a 0.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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