Latepost Incremental News, Cost Too Value: The Twitter Profits Study & Marketplace Reaction!

It is hard to believe but its been entirely simply over 3 months since Twitter went public, opening at $46/share too and hence continuing its climb into the stratosphere, inward the weeks following. As many of yous who read my posts know, my assessment of Twitter's value, prior to the IPO, was virtually $18/share too I believed too hence that  the $26/share at which the society was priced was a reach. Clearly, the marketplace position believes otherwise.

Last calendar week did run into a setback, though it may hold upwards temporary, inward Twitter's climb. It came inward the cast on an earnings study that on its face, at least, looked similar it contained skilful news. The society reported revenues that crunch expectations too claimed to convey turned the corner on profitability, at to the lowest degree using its ain adjusted version of earnings, alongside positive earnings per part for the quarter. The market, though, reacted negatively, wiping out 25% of Twitter's marketplace position value inward the class of a few minutes. Note, though, that fifty-fifty afterward this drop, Twitter's stock cost is at $53, good to a higher house my target hit for its value. In this post, I would similar to commencement expression at the tidings inward the earnings report, too and hence update my valuation to reverberate Twitter's commencement quarterly earnings study too run into if value (or at to the lowest degree my assessment of it) has shifted. I would similar to follow upwards alongside an exam of why the marketplace position cost may convey reacted the means it did to the data inward the report.

Twitter's Quarterly Earnings: Reading the tea leaves

With immature companies similar Twitter, a quarterly study tin sometimes atomic number 82 to large reassessments of value. Rather than prejudge the marketplace position reaction, it is worth breaking downwardly the report into its element tidings items. Let's start alongside the skilful news:

1. Revenue growth inward the 4th quarter was strong: Revenues to a greater extent than than doubled (increasing 116%) inward the final quarter of 2013 (relative to the same quarter inward 2012) too annual revenues inward 2013 besides increased past times 110% over the revenues inward 2012. Both numbers crunch analyst expectations.
   
2. While the company's reported operating losses surged inward the 4th quarter, a pregnant portion of its expenses were associated alongside R&D too employee compensation: Expenses are expenses, but these 2 items may hold upwards less onerous for 2 reasons. One is that R&D represents investment for hereafter growth, which is where investors run into Twitter's value coming from. The other, too shakier assumption, is that these expenses volition teach smaller, if non inward dollar terms but at to the lowest degree inward per centum terms, equally revenues teach larger. 
3. Advertising is working too at that spot is room to grow: The advertizing revenue per m timeline views grew to $1.49 inward the 4th quarter, from a picayune less than a dollar per m views, simply a quarter agone too this the driver for the revenue growth. The society besides noted that its sponsored tweets are a pocket-size per centum of the overall content too that at that spot is picayune danger of them overwhelming the content (and driving away users), at to the lowest degree for the moment. 

There were unopen to sour notes inward the study equally well:

1. User growth is slowing too Twitter is having to travel harder to add together users: While the break of users reached 241 million, that was a growth of entirely 4%  over the break final quarter, suggesting that growth is slowing. There is besides unopen to prove that Twitter directly has to travel harder to teach novel users too that the growth is non effortless similar it was before inward their life. Finally, articles/SB10001424052702303874504579373140762757688">this article inward the Wall Street Journal suggests a lagging inward user engagement, too at that spot is prove of a reject inward timeline views past times users.
2. International revenue growth is however lagging: While Twitter's user base of operations internationally is substantial, the proportion of it revenues that come upwards from these users is small. For whatever reason, Twitter's online advertising seems to non hold upwards equally productive exterior the US. To the extent that the potential user base of operations is far greater inward the remainder of the world, this has to hold upwards remedied if Twitter wants its revenue growth to continue.
3. The contest is non staying still: The skilful tidings virtually online advertising during the final few months was non restricted to Twitter. Facebook besides reported that its online advertising revenues were up, distinction I brand betwixt value too price. The successful IPO too the cost run-up inward the weeks afterward has made Twitter into a pricers' game, where it is mood too momentum that determines cost movements, non fundamentals. The nature of this game is that it tin shift unpredictably too inward reply to incremental or fifty-fifty trivial tidings stories. Did Twitter deserve to lose 25% of its value because its user base of operations did non grow equally strongly equally expected? Perhaps not, but did it deserve to double inward value inward the weeks before on the the world of no existent data that would atomic number 82 to reassess its hereafter equally a company? I don't mean value so! If yous are playing the pricing game, it is best non to essay to explicate (as many were trying to practise final week) what happens to the price, using fundamentals.

Am I predicting that Twitter's stock cost volition drib dorsum into the twenties? Of course, not, but I would non hold upwards surprised if it did, too if the drib was triggered past times unopen to other slice of trivial tidings or fifty-fifty non-news. At the same time, I would non hold upwards surprised to run into the stock double to $100/share, triggered past times a dissimilar tidings story. I convey used this analogy before but at that spot is no impairment inward using it again. When incertitude virtually the hereafter is high, markets (and investors) teach bipolar too predicting their behaviour is a fool's game.