Twitter (TWTR) Q2 Earnings Preview

by Dan July 26, 2016 11:21 am • Commentary• Trade Ideas

Event: Twitter will report their Q2 results tonight after the close.  The options market is implying about an 11% one day post earnings move, which is a tad rich to the 4 qtr one day average move of about 9%, and slightly below the 13% average over the 10 quarters the company has been public.

With the stock at $18.50, the July 29th weekly 18.50 straddle (the 18.50 call premium + the 18.50 put premium) is offered at $2.05. If you bought that, and thus the implied move, you would need a move to $20.55 or below $16.45 to just break-even.

Price Action / Technicals: Despite the stock’s 33% gains since June 10th, the stock is still down 20% on the year, down 50% from its 52 week highs made in July 2015, and down 75% from its all time highs made shortly after its Nov 2015 IPO.

For a stock like TWTR, where sentiment is so poor (11% short interest / 10 Buy Ratings, 26 Holds & 5 Sells with 12 month price target below where the stock is currently trading) it would not take much good news to have the stock breakout above one year technical resistance, which to my eye is about $21, a level the stock has not closed above since early January:

From Bloomberg
From Bloomberg

$14 to $15 is obvious technical support, and it would take a material miss and guide down for the stock to be back there soon.

Looking Back: When TWTR reported their Q1 results back in April the company reported monthly active users (MAUs) that were in line with expectations, which were NOT high coming in, a slight Q1 revenue miss, coupled with a massive Q2 revenue guide down to about $600 million vs consensus of about $675 million. While analysts were happy to see MAUs beat at 310 million, it’s impossible to ignore the massive deceleration, and not fear for an impending decline. Optically this would be a disaster for the company as they make the case to advertisers that their new video initiatives are worthy of greater “brand-oriented online video budgets” that seem to be gobbled up by Facebook, Youtube and Snapchat at the moment.

What to expect?  TWTR has been hitting the Live theme hard since Jack Dorsey’s return as CEO last year. As detailed by Recode’s Kurt Wagner, the company has been active signing up digital steaming rights for all sorts of content, but largely in sports (here):

For the past month or so, Twitter has been scooping up digital streaming rights from anyone who will hand them over — that includes deals with the NBA, Bloomberg, CBS and MLB Advanced Media, just to name a few.

Those deals, in aggregate, have quickly made Twitter a kind of 21st century digital TV network, a place where you may one day watch live video programming for sports and politics and entertainment just like you do on pay television today. The big difference is that instead of paying Comcast or Dish to watch these shows on your big screen at home, you watch over the internet, on Twitter, for free.

But as Wagner has noted, little of this content is “must-see TV“, and a lot of it can be found other places. So it’s an unproven ROI for investors and remains to be seen whether ads can even be sold against content displayed this way. Time will obviously tell, but investors may not be willing to wait too much longer.

If TWTR is the place for LIVE, then Q3 should be the quarter they dominate with the ongoing Presidential election, Olympics in August, NFL, MLB Playoffs (and the list goes on).  If they don’t see a global uptick in MAUs or better monetization (ad revenue per mau) then the stock is headed right back to the mid teens.

Estimates & Forecasts from Bloomberg:
2Q adj EPS est. 9c (range 4c-15c)
2Q rev. est. $607m (range $590m-$672m), co. forecast $590m-$610m on April 26
2Q Ebitda est. $153.9m (range $140m-$167m), co. forecast $145m-$155m
2Q monthly active users (MAUs) est. 312m (4 ests. compiled by Bloomberg News)

3Q adj. EPS est. 11c
3Q rev. est. $681.4m
3Q Ebitda est. $168.8m

My View into the Print:  After the stock’s run I am hesitant to add to existing but struggling long.

Could this quarter be the sort of ah-ha moment that many are waiting for? Much like Facebook’s (FB) Q2 2013 results? Remember, FB stock was in the crapper, but had a 30% one day move, and the stock never looked back Probably not. The problem for FB was not user growth and engagement, it was monetization on mobile, which was nascent and fixable. And once the company flipped the switch, it was off to the races.  Very different issues face TWTR as it’s more product specific without the user growth.

TWTR’s fixes will be multi-quarter in my opinion, and while better than expected guidance will be a start, investors will likely remain skeptical.

It’s long been my view that TWTR would be much more useful within a larger media tech platform than a standalone, especially when you consider the lack of user growth, and the deceleration in sales growth. With an enterprise value of just $11 billion, TWTR seems completely disconnected to its replacement value for a large media company. It has long been my view that Google, in particular, should buy TWTR. It would solve a few of their core biz’s massive blind spots like real time search. It also adds another in app search in mobile, helps with their lack of social offerings, adds an opportunity to leverage YouTube videos (and live video) and helps with their lack of short messaging app (to name just a few!).  With founder Jack Dorsey’s return to TWTR last fall, a deal like this seems unlikely, for now. They seem committed to leveraging the existing product first. And because of that I’d expect the company to be more of an acquirer than an acquiree in the near term and deploy some of their $3.5 billion in cash.

I’d be wary of looking at TWTR on a PE basis when it comes to valuation, on an adjusted basis it looks like 36x expected eps growth of 26% in 2016, but on a GAAP basis eps swings from an expected 51 gain to a 54 cent loss.  At about 4.8x expected 2016 sales, TWTR trades at a massive discount to FB’s 13.3x, and 15x ev/ebitda to FB’s 20x.

Oh and it is always fun to gauge sentiment and focus from Twitter execs, on Twitter. Here is COO Adam Bain from today:

In sum, I remain bullish on the product and the platform long term. What they need is time to make material improvement in their user issues.

We will be sure to update this trade idea. And we’ll follow this post with a post on trade ideas for those currently positioned, or have directional inclinations. Stay Tuned.