Event: TWTR reports Q2 results tonight after the close. The options market is implying about a 13% one day move which is a tad shy of the 6 qtr 16% average since its IPO.
Price Action / Technicals: YTD TWTR is down about 1% on the year, but most investors have been scared off by the stock’s 32% decline from its 2015 highs. For those who rode it up and then back down it feels like it’s down much more on the year than it is. And the lack of bounce over the last few weeks with the likes of AMZN, FB, GOOG, LNKD, and NFLX is very concerning from a relative strength point of view.
Since its post IPO highs in late 2013, the stock has been in a downtrend, despite not making a new low all time low over the last year:
There is really few other ways to describe the price action aside from atrocious, and the stock’s chart is at a fairly critical spot. There is no support until the 2014 lows just below $30, and below that the next stop is the $26 ipo price.
Volatility Snapshot: Short dated options prices are nearing the highest levels of the last year, as realized volatility is just off of all time lows:
Fundamentals: They pretty much suck. And the limbo the company may be in since their early June announcement of a CEO change has likely not helped motivate employees. At the time the company also pre-announced Q2:
Twitter also today reaffirmed its outlook for the second quarter of 2015. The Company continues to expect revenue to be in the range of $470 million to $485 million and adjusted EBITDA to be in the range of $97 million to $102 million. Stock-based compensation expense is expected to be in the range of $190 million to $200 million, excluding the impact of equity awards that may be granted in connection with potential future acquisitions.
Given how late in the quarter the press release was, I suspect there will be few surprises on the ranges given above, but I would not be surprised to see continued disappointment on user metrics.
Estimates & Forecasts from Bloomberg:
- 2Q adj. EPS est. 4c (range break-even-9c)
2Q rev. est. $481.9m (range $472m-$508m); June 11, TWTR forecast $470m-$485m
2Q Ebitda est. $103.2m (range $99m-$118m); June 11, TWTR forecast $97m-$102m - 3Q rev. est. $556.6m (range $511m-$586m)
3Q Ebitda est. $123.1m (range $99.2m-$148.0m) - FY15 rev. est. $2.20b; April 28, TWTR forecast $2.17b-$2.27b
FY15 adj. Ebitda est. $534.6m; April 28, TWTR forecast $510m-$535m
NOTE: April 28, TWTR reported 302m avg. MAUs for 1Q; co. said in 10-Q that total avg. MAUs including SMS Fast Followers would have been 308m TWTR said in filing it will be including SMS Fast Followers as part of total MAU count going forward
In a note to clients last week RBC analyst Mark Mahaney highlighted the following intra-quarter data points and points to focus on:
Intra-quarter d-points:
1) Mixed comScore trends – We saw mixed comScore US Multi-Platform traffic trends in Q2 with Unique Visitors declining 9% Y/Y, deteriorating from 15% growth in Q1. Total Mins / UV improved to a 10% Y/Y deterioration in Q2 vs. Q1’s 29% Y/Y deterioration.
2) CEO Transition – On June 11, Twitter announced that Dick Costolo would be stepping down as the CEO effective July 1. 3) Recent media reports highlighted Project Lightning – Which is Twitter’s initiative to provide current rich media content logged-in and logged-off audiences.
Key items to focus on:
1) User growth and engagement – MAUs (incl. SMS Fast Followers) grew 20% Y/Y in Q1 to 308MM, decelerating 1 point from Q4 growth rates. We anticipate a 2pt decel in Q2:15, and are est that Twitter’s global user base grew 18% Y/Y to 322MM MAUs, implying 13MM Q/Q Net Adds vs. 16MM in Q2:14. Twitter no longer reports engagement metrics.
2) Revenue growth trends…especially advertising – Ad rev grew 72% Y/Y in Q1, well below Street expectations. We expect to see continued deceleration over time, and in Q2, we forecast 56% Y/Y growth to $433MM.
3) Monetization gap – Twitter monetizes its users at a much lower rate than Facebook but is steadily closing this gap. TWTR received $1.26 for every MAU in Q1:15 compared to $2.34 for FB. However, TWTR grew its monetization 43% Y/Y compared to FB’s 29% Y/Y.
MY VIEW: I am long the stock and long September call spreads (read here) I am a lot less optimistic in the near term about the company’s prospects than I was a few months ago. My guess is that there are few CEO candidates that investors will be excited about, especially internal candidates. I would also guess that the changes that need to be made to accelerate user growth, engagement and monetization will take quarters not weeks/months.
I remain confident that the scarcity value of TWTR’s platform is not adequately reflected in its $21 billion enterprise value, especially when you consider Facebook’s $22 billion purchase of messaging app WhatsApp last year.
As for tonight’s results, I see expectations as low, but it also seems that despite the stock’s poor performance, that it is still a crowded long. I also see a slight miss and guide down as already in the stock at current levels and that this should be overlooked to some degree. Investors could give the company a bit of a pass as long as they’re still engaged in the search for a new ceo.
I think a hasty announcement of an internal ceo candidate and a miss/guide down and the stock is at $30 quickly.
An inline qtr, mild improvement in user trends and cautious optimism is met with some buy interest but unlikely taking the stock above $40
Name That Trade:
Call sales, or possibly even strangle sales against existing long stock in the very near term could be the play with vol as high as it is heading into the print. But I am a tad hesitant to cap potential upside given how volatile the stock has been around earnings.
FOR THOSE CONSIDERING NEW LONG POSITIONS for a potential turnaround and possibly a take-over, you may want to consider a Jan16 Risk Reversal:
With stock at $35.43 you could sell the Jan16 30 put at $2.10 and buy the Jan16 43 call for $2.10. Worst case scenario you would be put stock at $30, down 15% on Jan expiration, but you have long exposure above $43, up about 20% Between 30 and 43 on Jan16 expiration you would suffer no gains or losses. Between now and then you would suffer losses as the stock declines closer to the short put strike, or gains closer to the long call strike. This is a leverage trade that will lose deltas as you get closer to expiration the farther the stock is away from the strikes.