Twitter shares have been struggling since the company went public as investors wonder whether the micro-blogging platform will ever be able to spur significant user growth, and the trend continues today. The stock has weakened even further since Twitter’s second quarter earnings report as investors and analysts alike start to question whether estimates are too high.
Twitter estimates too high?
In a report dated Sept. 23, Citi analyst Mark May said he came to the conclusion that most estimates for Twitter are simply too high. After looking at multiple data points, he changed his rating from Neutral to Neutral/ High Risk and cut his price target from $37 to $30 per share. He said the estimates may assume that Twitter is able to meaningfully increase its monetization, possibly by more than it can. His new estimates are lower than consensus estimates.
He’s now estimating $3.15 billion in 2016 calendar year revenue, which is 7% below consensus estimates. For the third quarter of this year, he’s expecting earnings of 2 cents per share, and for the fourth quarters, he estimates 14 cents per share. For the full year, he’s estimating 30 cents per share, compared to the consensus estimate of 34 cents per share.
What Twitter needs to grow its revenue
According to May, there are three factors that will determine how much, if at all, Twitter will be able to grow its revenue. First is monthly active users, which is the one metric Wall Street has been giving the microblogging platform a hard time about since it went public. Second is user engagement, which can be measured through TimeLine views, which May uses as a proxy to measure how much time users spend on Twitter.
The third factor is monetization, which he measures as ad revenue per TimeLine view. He includes three sub-factors in that factor, which are ad load, click-through rate and pricing like cost per click, etc.
A formula for Twitter’s monetization
Twitter management has long been defending the company’s monthly active user growth, but they’re finally starting to admit that there’s a problem. They attributed most of Twitter’s revenue growth since the initial public offering to monthly active user growth and higher ad loads. These two factors enable the microblogging platform to increase the number of ad impressions.
More recently, management noted that if Twitter can’t grow its audience and improve user engagement, there could be a negative impact on revenue growth because ad availability may become limited. May believes these comments suggests that there’s no room for the company’s ad load to improve, at least not in the U.S.
Twitter’s growth potential
So what does this mean for Twitter’s real potential to grow revenue? The analyst sees it as being dependent on advertisers believing there will be a reversal in user growth trends and/ or at least one of the main monetization levers, like pricing, click-through rate, or ad load, can grow “materially” now.
May created a formula to look at Twitter’s monetization and how to improve it. He deconstructed the company’s ad revenue to break it down into users, engagement and monetization, coming up with this diagram:
He thinks consensus estimates require Twitter to see an 8% increase in monthly active users and “meaningfully ramp” the monetization of TimeLine views by at least 45% in the U.S. and at least 58% in the Rest of the World. He said this means Twitter will need to see “large increases” in click-through rate and pricing.
As of this writing, shares of Twitter were down 0.09% at $26.89 per share in premarket trading.