Twitter Inc (NYSE:TWTR) shares soared in their debut on Thursday, although they ended up closing slightly below their opening price. This morning in premarket trading, however, they rose more than 1% to pop back up slightly over their opening price on Thursday. Will the shares remain that high?
Wedbush analysts initiated coverage of Twitter with a Neutral rating and a $37 per share price target.
Why a $37 price target for Twitter?
Analysts were generally positive leading into Twitter Inc (NYSE:TWTR)’s debut on Thursday, although the immediate soaring price of the stock triggered a number of analyst downgrades. Wedbush analysts Michael Pachter, Nick McKay and Nick Citrin say to get their $37 per share price target, they’re assuming Twitter doubles its monthly active users from its current 230 million to 460 million over the next five years. They’re also assuming that the current timeline daily timeline view rate of seven grows to 10 as more Verified Accounts are added. The result would be an a total annual timeline view of 1.7 trillion views.
Wedbush analysts believe Twitter can generate up to 1 cent per timeline view, although their estimate of $.0005 per timeline view is far more conservative than that. According to their estimate, Twitter would see $8.4 billion in annual revenue. With gross margins between 65% and 70% and $2 billion in annual operating expenditures, they believe Twitter will be able to deliver $3.5 billion in EBITDA within five years. They’re using a “conservative EBITDA multiple” of 15 times discounted back at 15%, which leads them to their $37 per share or a valuation of $25.8 billion.
Twitter’s growth just beginning
Of course at this point Twitter Inc (NYSE:TWTR) is just in the early stages of growth, and Wedbush analysts expect that most of the 2.4 billion Internet users in the world will probably find something or someone on the micro-blogging site that they are interested in. They’re estimating that Twitter has 230 million monthly active users generating more than 500 million tweets per day. Because of the company’s size they believe it will “enjoy a competitive advantage for the foreseeable future.”
They note that Twitter has seen very rapid revenue growth over the last year years, including year over year growth in advertising services which is more than 100% for the last seven quarters. The company has also seen positive data licensing revenue even though Twitter has suggested that long-term growth in this area is fairly limited. They believe revenue growth in advertising services is why investors are valuing Twitter Inc (NYSE:TWTR) so highly right now and expect to see continued growth in this area because the company keeps introducing new premium ad products.
Strength in Twitter’s ad targeting
We’ve seen just how important ad targeting is in social media advertising thanks to Facebook Inc (NASDAQ:FB), and Twitter Inc (NYSE:TWTR) does show strength in this area, reports Pachter and his team. The company can get up-to-the-minute snapshots of what users are interested in and then combine them with users’ usage histories to create their interest graph, which makes ad targeting that much stronger.