Twitter Q4 – House of cards.

When so much is pinned on the future, the tiniest wobble is catastrophic.

• Twitter reported great maiden results but the slowing user growth caused the stock to lose nearly a fifth of its value.
• Q4 revenues and EPS were $243m / $0.02 compared to consensus at $217m and a loss of $0.02.
• Guidance nicely trumped expectations with Q1 14 revenues expected at $230m-$240m and FY 2014 at $1.15bn-1.2bn which compared to consensus at $215m and $1.13bn respectively.
• Twitter is finally counting its shares correctly with fully diluted shares (non-GAAP) at 612m compared to the GAAP figure of 362m.
• The market has been using share counts in the mid 500’s.
• This is very close to the number I have been using of 626m and so I am moving my diluted share count to Twitter’s count.
• The problem was the number of users which slowed to just 4% QoQ (241m users) missing my estimate of 250m.
• This was taken very badly as the user count is the only real handle that the market can use to ascertain what the future growth of the company will be.
• When a company is trading on 67x EV/Sales, growth is being priced in that is way beyond the normal horizon and the minute those assumptions are threatened the multiple will rapidly contract.
• This has been my problem with Twitter since the IPO.
• I can see revenue growth to $2bn (which it should hit in 2016) but beyond that I am really struggling.
• This is because at the end of the day Twitter is basically text messaging and this function has a limited level of usage when compared to what users do on mobile devices.
• RFM research indicates that users spend 5% of their time on mobile devices engaging in micro blogging which means that the revenue that Twitter can expect to extract is very fundamentally limited.
• This is unless it can expand into other areas which it has been trying to do with American Express and Chirpify.
• However, it looks like Twitter is trying to focus on growing the user base rather than encouraging its existing users to spend more time on Twitter but doing other things.
• An easy win will be instant messaging as text messaging in between Twitter users is clumsy, unintuitive and difficult to understand.
• Fixing this could meaningfully increase the amount of time that users spend on Twitter thereby increasing its opportunity to monetise.
• I have increased my estimates for Twitter as its ability to monetise its traffic has been meaningfully better than I had anticipated.
• Hence I think it will get to the $2bn revenue ceiling faster than expected but I see nothing that will get it past that level.
• Therefore I continue to be unwilling to pay now for revenues that not even Twitter knows how it is going to get.
• This leaves my valuation at $20.2bn or $32.98 per share.
• This is 40% below the after-hours price which has already knocked 17% off the valuation.
• Investors who bought at the IPO still have a chance to take an excellent profit but the shares still have a long way to travel in the downward direction.
• Twitter is a great company but the shares are still way overpriced.
• There remains only one action to take on this stock.