Why Twitter’s new CEO is a buy-for-action opportunity


People on Wall Street used to say that Twitter shares would jump when co-founder and CEO Jack Dorsey finally handed over the reins to a CEO solely focused on the social media company, rather than trying to make both Twitter and Square work at the same time, as Dorsey has been doing since 2015.

And even,


Twitter

(ticker: TWTR) the stock is down about 10% since last week’s announcement that Twitter chief technology officer Parag Agrawal would replace Dorsey as CEO. The liquidation offers investors a buying opportunity that they have not seen in years.

At a recent $ 42.07, Twitter is trading at 4.5 times the widely expected $ 7.5 billion revenue for 2023, when the company has enjoyed an explosion of new product launches. It’s the cheapest the stock has been since its pandemic lows, and below earnings multiples for Twitter’s large-cap internet peers.

“This is a strategically important platform, and by all objective measures it’s actually cheap,” said Elliot Turner, chief investment officer at RGA Investment Advisors, who has owned Twitter stocks for years. and has been a strong supporter of the buy side of his business.

Agrawal doesn’t just retweet Dorsey’s strategy. The new CEO on Friday reorganized the leadership of Twitter to improve its consumer, advertising and tech operations.

The heat had been mounting under Dorsey since March 2020, when Twitter was forced to give seats on the board to activist investors from Silver Lake and Elliott Management. Covid fears ultimately caused the stock to fall below $ 25. Dorsey’s replacement by chief technology officer Agrawal may have surprised some, but a source close to the company said it was long overdue.

Twitter action has fallen more than 20% this year. However, part of this poor performance can be attributed to its industry. While the internet stocks mega-cap like parent Google


Alphabet

(GOOGL) had a good year, most other Internet stocks went down.

A late-November survey by JP Morgan Securities analysts Doug Anmuth and Cory Carpenter found that their average internet coverage stock had fallen 13% this year, compared to a 22% increase for the


S&P 500

index.

Still, JP Morgan analysts rank Twitter among their top picks, saying its stock may double from here – as revenues rebound from the cold of Covid-19 and self-imposed lulls as Twitter updated its technologies for serving advertisements and promoting mobile phone applications.

Generating revenue is Twitter’s No.1 priority, analysts at JP Morgan note. Company revenue grew 37% year-on-year in September quarter, outpacing growth of parent company Facebook


Meta-platforms

(FB). Advertising revenue increased 41%.

The company has also set ambitious goals to increase its user base by 20% per year, reaching 315 million “monetizable daily active users”, or mDAU, by 2023.

Skepticism about that steep goal has contributed to the decline in Twitter action this year, says RGA’s Turner. In the September quarter, Twitter had an average mDAU count of 211 million.

As America’s real-time communications forum, Twitter experienced a bubble of activity during the polarizing period of the Trump presidency. The news cycle has been calmer this year.

Over the past two years, one of the main goals for Dorsey and new CEO Agrawal has been to revitalize Twitter’s product innovation. The fruits of these development efforts are just beginning to appear.

While not all new products have worked for Twitter, its audio service known as Spaces is proving popular. “When some of these things start to hit, the business will be worth multiples of what it is today,” says a longtime investor who is close to the business.

Behind the scenes, Twitter is also working hard to improve its services to advertisers. Branded advertising has long been its strength, but Twitter has not been a part of the direct response click-through revenue boom that has supported Google and others.

One key performance metric investors should watch is Twitter’s success in closing its direct response gap, as it strives to increase its proportion of brand ad revenue to direct response ad revenue. 85% / 15% to 50% / 50%.

Analysts have more confidence in Twitter’s revenue growth ambitions than its user growth ambitions. FactSet consensus forecasts nearly 40% revenue growth this year, to $ 5.1 billion, then around 20% next year, to $ 6.2 billion and $ 7.5 billion dollars in 2023.

Twitter’s development spending and the settlement of a lawsuit will leave a net loss for 2021. But the adjustment in one-time, non-cash charges – as Wall Street often does – leaves the consensus earnings forecast for 2021 at $ 0.29 per share, topping $ 1.30 by 2023. Longer-term forecast calls for earnings growth of 30% per year from there.

Despite the impressive growth prospects, Wall Street is decidedly cool on Twitter, with most analysts rating its action in Hold. This leaves a lot of potential if the business starts to exceed expectations.

And if not, there is another source of potential energy. Unlike most big tech companies, the founders of Twitter never secured control with control actions; this is what has left Twitter susceptible to pressure from activist investors like Elliott Management. While speculative, this also leaves Twitter open to an acquisition.

One thing’s for sure: there’s no shortage of topics to tweet about.

Write to Bill Alpert at [email protected] and Connor Smith at [email protected]


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