Twitter’s using a pro forma earnings metric for valuation purposes is seen as “uniquely treacherous” by analysts at Sanford C. Bernstein. The analysts noted that the company’s stock-based compensation is very huge, and this makes it difficult to correctly value the company.
Stock compensation for Twitter is massive
In a research note on Tuesday, the firm’s analysts observed Wall Street’s regular practice of using earnings metrics for Internet companies that do not include stock-based compensation. The research firm said that stock-based compensation is a “relatively underappreciated operating expense,” even when there is nothing innately wrong with using any given metric certainly and consistently.
When doing so, the research firm singled out Twitter, saying that the use of pro-forma earnings for valuation purposes is particularly unreliable. Twitter’s stock-based compensation charge is larger than earnings before interest, depreciation, amortization and taxes. Similar concerns were highlighted during Twitter’s November 2013 initial public offering. Bernstein noted that the metric was 247% of pro forma earnings last year, compared to 46% for Facebook. And this makes it hard to determine Twitter’s valuation.
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Bernstein arrived at a per-share value of $15 to $20 a share using generous assumptions on average revenue per user and margins and user growth. But the research firm said it is difficult to recommend the stock above $12 to $14 a share because the value of future stock-based compensation will occupy a large portion of the company’s pro forma free-cash flow.
Yet Bernstein went back to its earlier math to place a target on the micro-blogging site. The research firm’s model yields a price of $17 a share and a range of probabilities from $15 to $20. Bernstein noted that this target price reflects “the likelihood that some investors may use [pro forma] metrics to value the company.”
How to value the stock is not the only problem for Twitter investors. The social media firm is grappling with several issues, like though its revenue is expanding, it user base is not. Also the company is facing employee turnover at every level, especially at the top. Twitter’s current CEO, Jack Dorsey, is probably the company’s only hope to engineer a new rise.
On Tuesday, Twitter shares closed down 4.33% at $18.34. Year to date, the stock is down by almost 21%, while in the last year, it is down by almost 61%.