Twitter Inc (TWTR) 4Q Rev. Beat Highlights Multiple Growth Levers

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Wedbush Securities analysts Shyam Patil and Andy Cheng take a close look at Twitter Inc (NYSE:TWTR) in light of its recent mixed-bag of a 4Q13 report.

Twitter reported strong revenue

Twitter Inc (NYSE:TWTR) reported a strong revenue and EBITDA quarter, posting substantial upside to estimates. However, MAU growth (arguably the most important metric for the business) and timeline view growth both decelerated y/y and came in below expectations. Management believes that user growth will accelerate in the future, as new initiatives take hold, but uncertainty remains. Given the current valuation (~30x EV/2014 revenue) and user growth concerns, we are remaining on the sidelines with a NEUTRAL rating and $58 price target.

Highlights

4Q revenue of $242.7 million (+116% y/y) was 11% above our and consensus estimates, driven by strength in monetization (revenue/1000 timeline views) and data licensing (MoPub of $8 million). EPS of $0.02 was also ahead of our/consensus estimates of ($0.01) / ($0.02) on higher gross margins (+520 bps y/y) and EBIT margins (+ 670 bps y/y).

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Positives

1) Advertising revenue grew 121% y/y (vs. 123% in 3Q), beating our estimate and consensus by 9%. 2) Monetization was very strong during the quarter with revenue per 1000 timeline views growing 75% y/y (vs. 49% y/y in 3Q) and ahead of our estimate of $1.19. 3) Ad engagements saw 70% sequential growth driven by product innovations including Media Forward. 4) EBITDA margins came in substantially ahead of estimates, beating our estimate by 790 bps.

Items to note

1) MAU growth decelerated more than expected to 30% y/y (vs. 39% y/y in 3Q) with the US coming in at 20% y/y (vs. 33% y/y in 3Q) and international at 34% (vs. 41% y/y in 3Q). 2) Both US and international timeline views came in below expectations and declined sequentially for the first time since the company began reporting this metric. Management attributed the q/q decline to improved product design, which has essentially created new ways to interact with Twitter Inc (NYSE:TWTR) that do not show up in timeline views.

Valuation

Our 12-month price target of $58 is based on a reasonable EBITDA multiple of 20x our 2019 EBITDA estimate, discounted back at 20%. We believe Twitter Inc (NYSE:TWTR) has multiple levers to drive significant growth over the next several years as well as potentially deliver meaningful upside to our model.