Twitter: falling profit margins are an obstacle

0

Twitter, Inc. (TWTR) is a social networking company that connects a user to a network of people, ideas, news, opinions and information.

Shares of Twitter have posted losses of around 19% in 2021. The past three months have been tough for this social media stock, with losses of around 34%. Will the new CEO be able to run Twitter in 2022? I am bearish on TWTR stock. (See the top analyst stocks on TipRanks)

Business news on Twitter

The leadership of any listed company is a key catalyst that can move its actions, make all the important decisions related to efficiency, growth, profitability, implementation of vision and strategic goals. Late last month, Twitter reported that Jack Dorsey had decided to step down as CEO and the board had unanimously appointed Parag Agrawal as the new CEO.

What’s interesting is that when announcing the new CEO, Twitter said, “There is no change in the company’s previously shared outlook for the fourth quarter and full year. 2021, nor in its 2023 objectives. ” It may simply mean that it’s too early for the new CEO to implement key changes, and investors need to be patient over the next few quarters.

Earlier in October, Twitter announced that it had reached a definitive deal to sell MoPub to AppLovin for $ 1.05 billion in cash. Jack Dorsey, CEO of Twitter at the time, said, “This transaction strengthens our focus and demonstrates confidence in our revenue product roadmap, accelerating our ability to invest in commodities that position Twitter for growth. long term and best serve the public conversation. “

One of Twitter’s biggest challenges in 2021 and the next few years will be global regulation and scrutiny of the news. One example is Russia, which fined Twitter 3 million rubles ($ 40,920) for failing to remove Russian content deemed illegal.

Social Media Snap Stocks (BREAK) and Twitter have struggled in recent months due to changes to the privacy of ad tracking on Apple devices, a move that has led several analysts to lower their price targets on both social media platforms.

Third Quarter Profits: Missing EPS, Exceeds Revenue

TWTR stock earnings have a mixed history of battered and missing estimates. Third quarter earnings were a big failure with EPS of $ -0.54 versus an estimate of $ 0.17. Revenue of $ 1.28 billion topped $ 1 million and grew 37% year-over-year.

The monetizable daily active user (mDAU) figure was a failure, hitting 211 million from the 211.9 million analysts expected.

Total advertising revenue was $ 1.14 billion, an increase of 41%. Data licenses and other revenues totaled $ 143 million, an increase of 12%. Twitter reported negative operating income of $ 743 million due to a net one-time litigation charge of $ 766 million and due to ongoing investments.

The financial outlook for the fourth quarter of 2021 is mixed. Twitter predicts fourth quarter revenue of $ 1.5 billion to $ 1.6 billion, up 24%, and operating profit of $ 130 million to $ 180 million, down 29% compared to the previous year. This weak forecast was not expected, adding selling pressure on TWTR stock.

Fundamental risks

The sales growth rate has declined in the previous three consecutive years and the company reported a net loss of ($ 1.14 billion) in 2020. Two main factors of concern are declining operating and net margins. The operating margins in Q1, Q2 and Q3 2021 were 5%, 3% and -58%. Net margins in Q1, Q2 and Q3 2021 were 7%, 6% and -42%, respectively.

In the third quarter, the cost of revenues increased significantly by 34% to $ 484 million. With declining profit margins, Twitter will soon have to address these issues, exploring other sources of revenue.

Evaluation

Twitter is relatively overvalued due to its price / book ratio (4.9x) compared to the US interactive media and services industry average (3.2x).

The Taking of Wall Street

When it comes to Wall Street, Twitter has a consensual hold rating based on six buys, sixteen holds and two allocated sells in the past three months. Twitter analysts’ average forecast of $ 66.73 implies a potential upside of 53.6%.

Disclosure: At the time of publication, Stavros Georgiadis, CFA does not have any position in any of the titles mentioned in this article.

Disclaimer: The information in this article represents the views and opinions of the author only, and not the views or opinions of TipRanks or its affiliates. Read the full disclaimer>

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Share.

Comments are closed.