Strategic trade
Trade view / 27 July 2016 at 12:28 GMT

#SaxoStrats: Staying bullish on Twitter

Head of Equity Strategy / Saxo Bank
Instrument: TWTR:xnys
Price target:
Market price:

Twitter shares are down 11% in pre-market trading as the company's Q3 revenue guidance of $590-610 million was significantly lower than estimated at $681m. The company guides Q3 EBITDA in the range of $135-150m versus an estimated $169m and down from $175m in Q2. 

It seems like a very conservative guidance from management, in our opinion. The monthly active users were 313m versus estimates of 312m in Q2.
While Twitter’s Q3 revenue guidance translates into only 5% growth (year-over-year) against a projected digital ad market growth of 15% (y/y) management is doing the right things, carving out a niche in live sporting events and focusing more on in-feed video plays. 

In the longer term this strategy has the potential to increase ad budgets from existing clients but also lure new clients onto the ad platform.
Not everything looks bad at Twitter. The underlying cash flow generation is improving fast with the 12-month trailing cash flow from operations rising to $578m in Q2 up from $140m a year ago. 

The cash flow to net operating assets ratio rose to 35% in Q2, which is a strong metric. Against the backdrop of temporary revenue pressure, Twitter has the scope to cut the number of employees (standing at 3,800 in Q1) which is vastly more than needed if there was a greater focus on internal processes and lean operations.


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If we assume conservatively that revenue only grows to $2.73 billiob in FY17 then from a efficiency perspective, Twitter should be able to get to an adjusted EBITDA margin around 40% which would translate into $1.09bn in EBITDA. 

With today’s expected decline in the share price, that translates into a forward EV/EBITDA of 8.8 which is a reasonable valuation given the long-term fundamentals. So even the slightest improvements to these expectations would increase the upside dramatically.
After today’s results and the likely decline in share price, the M&A takeover probability has likely gone up again which could be a positive event for current shareholders.

— Edited by Michael McKenna

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Non-independent investment research disclaimer applies. Read more
peter peter
superb article.


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