Twitter Inc (TWTR) Preview: User Growth Still A Challenge

Twitter Inc (NYSE:TWTR) is scheduled to release its next earnings report tomorrow. On average, analysts are expecting a loss of 1 cent per share on $283.2 million in revenue. Goldman Sachs analysts are actually a little big ahead of consensus on revenue, which they’re estimating will be at $289.2 million. That represents a year over year growth of 108% and is higher than Twitter’s own guidance range, which tops off at $280 million.

What to expect in Twitter’s earnings

In a report dated July 25, 2014, analysts Heath P. Terry and Heather Bellini and their team said the drivers of their revenue estimate are a 21% year over year growth rate in Timeline views and a 79% growth rate in ad revenue per thousand Timeline views.

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They estimate $24.8 million in adjusted EBITDA, which suggests that Twitter will report margins of 8.6%. That’s lower than the consensus estimate of $33 million and slightly below the lowest end of Twitter’s guidance, which is between $25 million and $30 million.

Possible downside risks for Twitter

The Goldman Sachs team notes that downside risks for user engagement and user growth remain, particularly because of third party data. They cite data from comScore, which saw an average of 115.1 million unique U.S. users in the second quarter. That’s a 17% adjusted year over year increase, compared to the previous quarter’s adjusted growth rate of 20%. They had been estimating 57.8 million monthly active users (a different measurement), which is an 18% increase year over year. The analysts think the difference between their estimate and comScore’s estimate is because 57 logged-in users offers “a significant opportunity for Twitter.”

However, their checks with advertisers suggest Twitter is seeing strong momentum. They note that estimates for the next 12 to 18 months will depend on monetization, although the multiple at which Twitter trades depends largely on whether the company’s restructured management team will be able to increase engagement and the number of monthly active users on the platform.

Twitter continues to innovate

The Goldman Sachs analysts counted 33 “unique product innovations” from Twitter over the last couple of quarters. Those innovations include photo editing and sharing, the introduction of GIFs and better notifications, which are designed to increase usage and engagement by four to five times “the development run rate over the prior two years.” However, they note that these efforts have yet to significantly impact engagement or user growth.

The analysts maintained their Buy rating and $52 per share price target on Twitter. They think the premium is justified because of how fast the micro-blogging company is growing.