Twitter Stock: Growth, Buybacks, And Cheaply Valued At 5x Sales (NYSE:TWTR)

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Article first published on Deep Value Returns.

investment thesis

Twitter (NYSE:TWTR) put out a mixed Q3 report. Even though its topline was strong, its profitability was nowhere to be seen. Even if we add back the one-off litigation-related charge of $766 million, its profitability was a lot less than desirable.

That being said, Twitter declares it remains on a path to reach $7.5 billion in revenues by 2023, implying that it continues to grow its top-line at approximately 22% CAGR over the next couple of years.

Paying 5x forward sales Twitter is not expensive, particularly as its platform is relatively immune to privacy changes, given that its users intently opt into topics that interest them.

All that being said, with more than $4 billion of net cash on its balance sheet, paying 8x forward sales makes this strong attractively priced.

Investors’ Sentiment Turns Negative

TWTR price change
Data by YCharts

Twitter is a stock where investors have long ago been dissatisfied with its progress and valued it in the bargain basement.

But as it transpires, Twitter is actually growing at a rapid rate. And here’s my bullish thesis, come what may, when you peel back Twitter’s poor narrative and actually pay attention to its progress, you can see that the platform continues to drive topline growth.

Thus, to be absolutely clear here, my bullish investment thesis with Twitter has less to do with the overall growth of the user base, and practically everything to do with the prospective growth in user engagement.

For Twitter, increased user engagement means that advertisers are attracted to spend their advertising budget on Twitter. If advertisers want to get up close with an engaged user community in real time and be able to iterate their advert they will struggle for a better platform than Twitter.

In essence, more user engagement, bigger ROI for advertisers, more advertising dollars spent on Twitter, more ad revenues.

Revenue Growth Rates Pick Up Speed

Twitter revenue growth rate

Source: Author’s calculations

The overall worry facing Twitter? How would Apple’s (AAPL) privacy changes affect Twitter? Turns out that not that much.

This is what Twitter said during its Q3 2021 earnings call,

The revenue impact we experienced from ATT (App Tracking Transparency) in Q3 increased on a sequential basis but remained modest

In fact, if you look out to Q4 2021, its growth rate remains robust, particularly given that Q4 last year was a pretty tough comparison to go up against. Hence, to be able to go against that heightened revenue base of last year and still put out more than 20% growth, I believe demonstrates that Twitter is not growing anywhere near as slow as many investors believe.

What’s more, Twitter reminds investors that despite divesting of MoPub, Twitter is still on a path for its revenues to reach $7.5 billion by 2023.

In other words, Twitter is letting investors know that they expect to grow their topline at more than that 22% CAGR over the next two years. This is providing investors with incredible visibility, something that Twitter has been notorious for not providing in the past.

Engagement is Everything for Twitter

How many times have I heard investors argue that Twitter is outdated? What about Tips, Super Follows, and Ticketed Spaces? What about Spaces? Those are new products that are resonating with users.

The more engaged users are with Twitter, the more revenues will increase. On that basis, it was disappointing to see that total ad engagement was only up 6% y/y in Q3.

On the other hand, Twitter has declared its ambition to improve its performance-based advertising, with direct response adverts. This is where advertisers target specific groups of users, rather than mass advertising. It’s more expensive for advertisers, but the ROI they get is higher, with better success rates.

So, Twitter has embarked on improving e-commerce activities. This is still a nascent revenue stream for Twitter, but the ability to charge for hosting newsletters continues to gain momentum.

The Blemish on the Report: Path to Strong Profitability Reverses

Twitter GAAP operating income

(Source)

Even if take back its litigation charge of $766 million, Twitter’s adjusted operating profits would be $23 million, approximately 40% lower than the same period a year ago, as Twitter continues to invest in talent, infrastructure investments in data center build-outs to support audience growth, and product innovation.

All that being noted, it was great to see that share repurchases continued in the quarter, with Twitter deploying a further $169 million towards share buybacks, bringing the total for this year so far to $915 million.

At this pace, Twitter will have bought back 2% of its market cap before the year is out.

Valuation – Attractively Priced

Twitter presently holds $7.4 billion of cash and equivalents on its balance sheet. What’s more, the sale of MoPub is to be completed in 2022 and will bring in $1 billion of cash. This is offset by the $3.6 billion of convertible and debt. Altogether, this equates to $4.3 billion of net cash. So, when I see investors argue that Twitter doesn’t make any cash, I find it mind-boggling.

Twitter holds more cash on its balance sheet than some of its peers will make in revenues over the next 10 years. yet Twitter is priced at 5x next year’s sales.

For reference, as you know, both Microsoft (MSFT) and PayPal (PYPL) have separately made bids for Pinterest (PINS) at valuations approximating 13x its 2022 sales.

This insight once more reinforces to me that Twitter is trading at a discount to what a knowledgeable and independent buyer would pay for a profitable social media platform. Not to mention one that’s on a path to grow its revenues at more than 22% CAGR, while buying back shares along the way.

The Bottom Line

Didn’t read my article? Here’s the bottom line, however you appraise Twitter, the stock is now absurdly cheap.

The one thing that I would like to see from Twitter is an improvement in its path towards robust profitability.

That being noted, I don’t believe that I’m paying a lot for Twitter right now, particularly as it continues to make its way towards $7.5 billion in revenues by 2023.

Furthermore, having spent $915 million in share repurchases so far this year, as well as a likely spend of $50 to $100 million in Q4 2021, implies that Twitter will have repurchased 2% of its market cap this year. Despite investing for growth and reaffirming its ambitions to grow its topline by more than 20% CAGR.

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