When Twitter Inc (NYSE:TWTR) released its second quarter earnings beat with 124% year-on-year revenue growth and non-GAAP earnings of 2 cents per share, versus the expected 1 cent per share loss, it jumped more than 30% overnight and has remained above $42 for the last few weeks (currently $44.70). Many bulls felt vindicated and skeptics had to acknowledge that at the rate its advertising revenue has been growing it should be able to get GAAP earnings into the black before too long. But now that the revenue story is starting to prove itself, Twitter’s use of shares has come into question.
Larger float makes GAAP EPS losses look smaller
“We have a loss-making but fast-growing company, which can provide serious competition to Facebook, as it captures an increasingly larger share of the advertising market for social network services,” says a recent InvestCafe report. “However, growth of this kind costs shareholders dearly, as the company finances its operations at the expense of its share capital… I stand by my opinion that Twitter was too fast with an IPO.”
InvestCafe points out that despite Twitter Inc’s (NYSE:TWTR) strong second quarter numbers, it’s actually benefiting from two different negatives that are sort of canceling each other out. On the one hand, operating and net losses jumped to about $150 million and $145 million each last quarter, on the other hand the number of shares outstanding also jumped by more than 4x in the last year. The result was a GAAP loss of $0.24 per share, but on a much larger base of shares. Investors may feel like they are getting closer to the day when they will be rewarded for backing the social media underdog, but when that day comes the rewards will have been heavily diluted. For some reason, InvestCafe wraps up its fairly bearish take on Twitter Inc (NYSE:TWTR) with a very specific $69.39 price target.
Stock-based compensation has to figure into Twitter valuation
Figuring out how to deal with Twitter Inc’s (NYSE:TWTR) use of stock-based compensation is by no means straightforward. NYU finance professor Aswath Damodaran has argued that some amount of the compensation to R&D employees could be capitalized, for example, but it still should be measured as an expense and the new asset depreciated. However it gets factored in, a reasonable valuation has to take Twitter’s heavy reliance on issuing stock into account to get a sense of what investors can expect to get back when the company eventually turns profitable.
