Twitter: Black and Blue, but Read All Over
For the past year, TWTR has been whipsawed on the volatility of its monthly active user growth and the revolving door of the company’s management ranks. While many investors are skeptical, the company recently outlined a narrative by which its revenues could rise tenfold in the intermediate term. We believe that the scenario, which relies on doubling its monthly active users, increasing user engagement, boosting ad density and monetizing unregistered users, is conservative. TWTR’s vast unregistered user base will be tapped as the company resolves functional problems in its app design and communications strategy. Moreover, a powerful secular shift toward digital advertising and rich new ad formats will support both higher ad loads and better ad pricing. We are more skeptical on TWTR’s ambitions to monetize unregistered users, but note that the potential to leverage the platform into new products is considerably greater than has been implied by management’s new narrative. Given less intensive infrastructure requirements than either GOOG or FB, we expect TWTR to deliver superior profitability as it gains scale, and project better than 80% GM and 50% EBITDA margins for 2019. Applying a FB like 19x multiple to 2018 revenues and discounting back at a 30% discount rate, reflecting considerable market and execution risk, we believe TWTR shares have more than 100% upside from current prices.