Huawei & Twitter – Results and politics.

Twitter Q4 2020 – User issues.

• Twitter reported good Q4 2020 results, but it has run out of road when it comes to user metrics.
• Q4 2020 revenues / EPS were $1.29bn / $0.27 ahead of consensus of $1.19bn / $0.16.
• Twitter’s new user measure (monetizable daily users) mDaU were slightly below expectations of 193.5m as there was a small but measurable impact from the bans and interventions that Twitter has made related to the content that is posted.
• This new metric was created when Twitter’s overall user base stopped growing and measures how much of that user base it can monetise.
• Given the sudden jump a year ago related to the pandemic, the Twitter is now paying the growth in lower growth expectations going forward.
• This makes sense because Twitter’s problem has always been that while it is great at monetisation, the time that people spend engaged with its services is quite limited.
• This is why it is unable to become a revenue giant like Facebook or Google and must now seek alternative avenues of monetisation such as subscription.
• This makes the $4.6bn 2021 consensus forecast for revenues somewhat of a stretch which I think adds risk to the valuation which currently stands at 9.8x 2021 EV/Sales.
• I would be taking profits if I had this one.

Huawei – pointless errand.

• Huawei has filed a lawsuit against the FCC challenging its categorisation as a threat to US national security but seeing as all power on this issue rests with the executive branch, this lawsuit looks pretty pointless to me.
• Huawei claims that the FCC’s label is arbitrary and capricious and lacks the substantial evidence required to make such a categorisation.
• Even if Huawei wins this case, the impact is likely to be negligible.
• This is because the Export Control Reform Act which was passed in 2018 effectively delegates all power on this issue to the executive branch.
• Consequently, it is the White House that directs the actions of the Department of Commerce which is ultimately responsible for setting the rules for Huawei.
• The White House has been quite firm so far with its commentary on China and as a result, I continue to think that nothing is going to imminently change.
• Hence, there is little scope for Huawei to begin buying the 5G components it needs to make its phones and its base stations and so the scene is set for a very difficult 2021.
• Samsung, Nokia, Xiaomi, Oppo and Vivo are likely to be the main beneficiaries.
• I still have a long position on Nokia and continue to think the shares are worth around €6 on a scenario where Nokia takes 30% of Huawei’s share in the coming years.