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What Financial Result Does Twitter Need To Hit On Wednesday?

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Twitter reports after the close on Wednesday, February 5. Its stock has been on a tear since its IPO on November 7 at $26 and closed the first day at $45.10. It has subsequently hit a high of $74.73 and is now around $65.

At a price of $65 Twitter’s market cap is approximately $45 billion when you include the options and Restricted Stock Units (RSUs) that have been awarded but not vested along with 14.8 million shares for the MoPub acquisition.

First look at Facebook’s results

When looking at Facebook’s chart the stock was stuck in a range of the mid-$20’s to the low-$30’s from late 2012 to July 2013 when it reported its June 2013 results. It was that quarter that it surprised the Street when it reaccelerated its year over year revenue growth going from 38% in the March quarter to 53% in the June quarter. The stock jumped from $26.51 to close at $34.36 the next day and then continued to rise to $55 in mid-October.

The shares had a move down to just under $45 and recovered back to $55 before it announced its December quarter results when it combined further acceleration in its revenue growth to 70% (when normalized for four months of payment revenue in the prior 2012 quarter) and more important substantially increased its gross margin from 75.4% to 81.4% (removing the stock compensation expense). The shares are now trading at almost $63 for a market cap of over $160 billion.

Note the gap in the July 2012 timeframe from $27 to $24 and then subsequent decrease to under $18. This was when Facebook announced its first quarter as a public company. Its revenue growth went from 45% in the March quarter to 32% and there were concerns about its mobile strategy.

Source: StockChart.com

Believe revenue growth is the key metric

This will be the first quarter that Twitter announces its results post-IPO. While it may not have the same move down that Facebook had it bears being cautious due to Twitter’s valuation.

The sell-side analysts are expecting revenue of $217.8 million for 94% revenue growth after 105% in the September quarter. They are then expecting revenue to drop slightly sequentially to $215.2 million for 88% revenue growth. For 2014 revenue is expected to be $1.13 billion for 75% revenue growth compared to Facebook at 53% growth and $11.2 billion in revenue. These are all higher rates than what Facebook was generating at its IPO but Twitter has to hit these levels if not exceed them for the stock to continue to work higher. If there is any kind of slowdown, especially in its advertising revenue since it is over 90% of total revenue, the stock should get pummeled.

Twitter’s gross margin has been pretty constant between 64% and 65% for the first three quarters of 2013. While I would expect it to trend up a bit as revenue grows it could need a significant jump similar to Facebook’s. While it isn’t necessarily needed in this or the next quarter (but would be very beneficial if it did) at some point in the next year or two the company will need to demonstrate that it can increase gross margins.

There is little margin of error

With a market cap of $45 billion Twitter is trading at 40x its 2014 revenue while Facebook is it about 15x. Twitter doesn’t have much margin of error and even if it hits or exceeds expectations a lot is already built into the share price. It could “grow into” its market cap but watch out for air pockets along the way as day traders and momentum players have been trading 25% of the shares on a daily basis.

Source: StockChart.com

Follow me on Twitter @sandhillinsight. You can find my other Forbes posts here.