Is Twitter Stock a Buy?

Social media platform shares Twitter ( TWTR 27.12% ) exploded higher on Monday, rising around 30%. The big move came as You’re here (TSLA 5.61% ) and SpaceX founder Elon Musk revealed he had established a 9.2% stake in the company. Clearly, some investors believe Elon Musk’s interest in the tech stock is good news for its long-term potential. But instead of betting on the stock just because Elon is buying stocks, let’s take a closer look at the company’s fundamentals against its stock price to see if the stocks really look attractive or not.

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Twitter’s strong revenue momentum

In Twitter’s fourth quarter, revenue grew 22% year over year. Management said in the company’s fourth-quarter shareholder letter that this growth was driven by “continued improvements in revenue products, strong sales execution and a broad and continued increase in advertiser demand.”

Of course, the growth of the company’s number of monetizable daily active users is fundamental to this growth. Without a strong and healthy user base, advertisers would not be very interested in the platform. To that end, Twitter’s monetizable daily active users grew 13% year over year in the fourth quarter, reaching 217 million. This user growth, management said, has been aided by a combination of product enhancements and platform conversations about current and global events.

Importantly, management expects this robust revenue growth to continue into 2022. Management has forecast revenue this year to grow at a rate of between 20% and 20% excluding income from MoPub assets it divested and reduced from 2021. financial.

Evaluation

There is no foolproof way to establish with certainty the valuation of a stock. But in an approach that can perhaps give us an idea of ​​what the company is worth, we could take Twitter’s 12% net profit margin from the fourth quarter and apply it to analysts’ consensus forecast for a figure of business of $5.9 billion in 2022 to estimate company revenue. potential earnings, then apply a valuation multiple to those theoretical earnings. This calculation would translate to a net profit of $708 million in 2022. Notably, however, the company’s plans to reinvest in growth opportunities will likely prevent Twitter from reaching such a high net profit in 2022. But this exercise helps demonstrate what earnings might look like if management’s priority was to maximize earnings today. Concluding this assessment, if Twitter were trading at 40 times these hypothetical earnings levels (an ideal multiple for a fast-growing tech company with likely margin expansion over the next decade), that would put the fair value of the Twitter market cap at $28. billion – a level the company was trading at notably at the start of the month.

Unfortunately, Elon Musk’s interest in the stock has prompted plenty of additional investment from Wall Street, and the company now has a market capitalization of $41 billion. While its post-investment valuation in Elon Musk doesn’t look terribly expensive, it makes the stock too expensive to call a buy at this level.

To be fair, this superficial approach to valuing Twitter stocks might be too conservative. After all, Metaplatforms has earned a net profit margin of over 30% in recent years. If Twitter’s net profit margin reaches similar levels over time and revenue continues to grow rapidly, even a market cap of $41 billion could represent a respectable entry point into the action. But for now, investors may want to consider sitting on the sidelines and hoping that Elon Musk’s stock premium dissipates.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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