Twitter, Inc.


Ticker:                          TWTRNature of Business:    Communication ServicesLocation :                              USA
Recent Price:           $66.12   52-Week High/Low: $80.75/27.12Estimated Fair Value:      $44.20-$49.50
Expected Return:    13.7%Consider Buy:                   Below $49.50Business Risk:                     High
Financial Risk:      MediumEconomic Moat:              WeakCorporate Governance: Strong

Company Overview
Twitter, Inc. (TWITTER) is a social media platform that was incorporated in April 2007. The company went public in 2013 and its shares were subsequently quoted on the New York Stock Exchange. TWITTER derives its revenue from two business segments namely Advertising Services and Data Licensing & Others. Advertising sales remain the major source of revenue; over 80% of total revenue is attributable to the sale of advertising services. The advertising revenue comes from the sale of promoted products and the placement of advertisements on third-party websites. Promoted products enable advertisers to reach target audience via promoted accounts, promoted tweets and promoted trends.

TWITTER has made a series of acquisitions to deepen its market penetration and broaden its product offerings. Recently, it acquired Revue which helps publishers monetise their newsletters. The company has also established an office in Ghana as a way of penetrating the continent of Africa with its products.

Jack Dorsey is the co-founder and chief executive officer (CEO) of TWITTER. He was the chairman of the board of directors before he was appointed CEO in September 2015. David Rosenblatt has been a director of the company since December 2010. Robert Zoellick, a former president of the World Bank Group, joined the board in July 2018. The other members of the board of directors are Jesse Cohn, Egon Durban, Omid Kordestani, Martha Lane Fox, Fei-Fei Li, Patrick Pichette, Ngozi Okonjo-Iweala and Bret Taylor.

Investment Thesis
Despite an increasing revenue, TWITTER has not been able to consistently grow its operating profits. In fact, it could not sustain the improvement in profitability achieved in 2018 and 2019. An average of 40% of revenue has been expended on Research and Development (R & D) over the past ten years. Total costs have surpassed total revenue, on average, by 28.5%. This is why the company has been struggling to make profits over the years. We expect product improvements and innovation to increase users’ engagement with its products and boost earnings.

The establishment of its office in Africa will strengthen its presence and boost its earnings from outside the USA and Japan, its major markets. Over the years the USA has been responsible for 64% of total revenue; Japan has produced 13.1% of total revenue while the rest of the world has generated 25%. More offices are anticipated in other parts of the world as they present opportunities for the company to serve them with products that meet their specific needs.

Management’s effort at growing the business is commendable. Continuous product improvements and market development should enhance the visibility and adoption of its products by advertisers. In addition, we expect management to explore other avenues in order to diversify its sources of earnings.

TWITTER does not pay dividends to investors. The profit margins and returns of TWITTER are not encouraging at the moment. It seemed to have turned the corner in 2018 but it failed to sustain the momentum judging by its results for the 2020 financial year. Total cost reached 99.3% of revenue as at 31st December 2020. But we believe it will turn the corner in the medium term. Quarter 1 result to 31st March 2021 showed that revenue grew by 28.3% to $1 billion compared to $807.6 million of the corresponding period of the preceding year.  Revenue in the USA and Japan increased by 19% and 30% respectively. Advertising sales jumped from $682 million to $899 million, gaining 31.8% year-over-year. Operating income was $52.2 million as against $7.4 million operating loss of the first quarter of the year 2020. Operating profit margin of 5% was an improvement over -0.9% of quarter 1 of 2020.

TWITTER is currently trading above our fair value estimate ranging from $44.20 and $49.50 per share. Therefore, it appears to be overpriced. We expect a return of 13.7% on a share of the company.

Financial Overview
TWITTER had revenue of $3.7 billion in the 2020 financial year compared to $3.5 billion in 2019. 86.3% of revenue came from advertising sales while Data Licensing & Others segment produced the remaining 13.7%.  The USA and Japan were responsible for the bulk of the revenue; they generated 70.7% of total revenue (2019: 71.7%). However, revenue growth was slower in both countries; sales in the USA increased by 6.9% in 2020 compared to 18.4% of the prior year. Likewise, sales increment in Japan was 2%, down from 5.7% of a year earlier. The rest of the world produced a $1.1 billion revenue, 11.4% more than the figure for 2019.

Profitability got worse due to a rise in operating costs. TWITTER reported total costs of $3.7 billion in 2020 as against $3.1 billion in 2019. This translated into a rise of 19.3% compared to 19.5% increment of the year before. As a result of this cost increment, operating income lost 92.7% from $366.4 million in 2019 to $26.7 million in 2020. The company has only managed to make profits twice in the last ten years.  Loss Before Tax was $50.9 million in 2020 in contrast to a Profit Before Tax (PBT) of $390.1 million of the preceding year. In the same manner, Loss After Tax dipped by 177.5% to $1.1 billion due to provision for income taxes.

Cost of revenue jumped by 20.2% to $1.4 billion, causing a marginal increase of 1.2% in gross profit in the year under review.  R & D cost increased from $682.3 million to $873 million; general and administrative expenses moved up 56.3% to $562.4 million. The gross profit margin was 63.2%, down from 67.1%.  Operating profit margin slumped to 0.7% compared to 10.6% of a year before. PBT margin was -1.4% as against 11.3% achieved a year earlier. Profit After Tax (PAT) margin dropped to -30.6% from 42.4%.

Total assets have been expanding. There was a 5.3% year-over-year addition to total assets. However, total equity shed 8.4% owing to the loss incurred in the year. Debts were at a manageable level as they were 26.1% of total assets and 43.8% of total equity.

Business Risk
The company depends on online advertising which is very competitive.  This makes its earnings and margins vulnerable to attack from competitors especially the bigger players in the industry. Again, failure to churn out innovative products could reduce patronage from advertisers who hardly have long-term commitments.

Recommendation: Overpriced

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