Threatening Multi-Year Highs, Twitter Stock Remains a Buy

Stocks To Buy

Twitter (NYSE:TWTR) went public almost seven years ago. After the first day of trading back in 2013, Twitter stock closed just shy of $45. As I write this, it’s trading a bit below $46.

Twitter (TWTR) app being shown on a phone screen held in a person's hand.

Source: Worawee Meepian / Shutterstock.com

Of course, TWTR had a ride to get back basically to breakeven. The stock looked like a ‘busted IPO’ (initial public offering) within months, and was below $20 before the end of 2015.

In 2016, it seemed almost certain that Twitter would get acquired. Twitter stayed independent, and the stock wound up doubling anyway. After plunging amid the worst of the pandemic-driven selling this March, Twitter stock now is threatening to reach a five-year high.

It has been quite a ride for the stock. And that doesn’t even cover what a ride it’s been for the business. President Donald Trump famously used the platform as a key part of his presidential run. Since his election in 2016, Trump has used the platform to exhort supporters and exasperate detractors.

More recently, some of Trump’s tweets have highlighted the company’s difficulty in policing its platform. So far, Twitter has managed mostly to alienate users on both the left and the right.

Twitter even has a chief executive officer who actually runs two separate (and large) public companies. There’s simply a lot of drama here.

But I don’t think that’s necessarily a bad thing for the stock. There’s drama because Twitter matters — and, in its own way, that’s a reason to buy Twitter stock.

Understanding the Fundamentals

Admittedly, the fundamentals surrounding TWTR stock don’t look particularly attractive at the moment.

Most notably, Twitter trades at 62x the consensus Wall Street estimate for earnings per share in 2021. Analysts on average are looking for 74 cents in EPS.

That’s a big multiple. It looks even bigger when considering the company’s growth rate. 2018 adjusted EPS (which is what analysts generally project) was 47 cents. Investors are paying 62x forward earnings for a company growing those earnings at only about a 15% annualized clip.

From a valuation perspective, it certainly seems like investors can do better. But I’d keep a couple of things in mind when it comes to Twitter profits.

First, the company is investing behind its business in areas like marketing and (particularly) moderation. Those investments will start to taper, which should allow earnings growth to accelerate.

Second, the pandemic has significantly impacted the advertising market, and those effects are expected to linger into next year. They will fade as the world returns to normalcy, which too should help growth.

Finally, Twitter simply has a lot of room for improvement. The company still needs to, and will, attract better, bigger, more consistent advertisers. There’s still work to do to fine-tune the operating model to increase effectiveness for both users and advertisers.

Meanwhile, the social media operating model has extremely high incremental margins. That is, big a chunk of additional revenue dollars generally turn into profits. Twitter isn’t a manufacturing company that sees increased costs for increased units.

Improvements Highlight Broad Case for Twitter Stock

The simple fact is that Twitter can and will get better. A lot better. Its moderation policies clearly need some tweaking. Advertisers still haven’t jumped on board at least in part because of the site’s toxic reputation.

Better moderation can help on that front. So would a thawing of the polarization among the electorate in the U.S. and elsewhere in the world.

Twitter needs to police itself better. It needs to sell itself better. It probably needs to run itself better as well.

As far as Twitter stock goes, that’s all actually good news. That might seem like an odd and counterintuitive claim to make. But room for improvement means just that: room for improvement. Again, high incremental margins mean that a few tweaks can have a big impact on earnings, and thus the Twitter stock price.

Fundamentals aside, it’s hard to argue that Twitter doesn’t have real value. It’s at the center of the political world, and not just in the U.S. It’s an exceedingly useful platform (even for investors). Competition in social media can’t be shrugged off, but Twitter clearly has found its niche.

It just needs to do a better job in its niche. I’m confident it will, and that should be enough to move Twitter stock to new multi-year highs and beyond.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

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