It looks like there's no end in sight for Twitter's (NASDAQ:NYSE:TWTR) current rally.
After surging 35% in one month and 155% from a year ago, this social media company has crushed analyst predictions for the stock.
The remarkable turnaround in Twitter’s fortunes—which took the stock to a three-year high of $44.55 on June 13—is forcing analysts to play catch up. JPMorgan & Co. yesterday raised its target for Twitter’s stock to $50, a 21% upside from Monday's closing price of $44.07, naming the company one of its top stock ideas for this year, alongside Google (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN).
That's seriously lofty company. But despite the surprising surge and newly earned analyst optimism, some investors still aren’t sure if Twitter is a stock worth holding over the long run. This is the same business, after all, that saddled investors with as much as $32 billion in equity losses for three years after going public in November 2013.
Even after the explosive gains of the past year, Twitter is still only about halfway to its all-time high of $74.73, reached in December 2013. Should loyal investors cash in after recovering some of their losses, or is Twitter a stock which deserves a place in your long-term portfolio?
We believe this ongoing rally is different than previous rebounds. Here's why.
To begin with, this year's gains aren’t being fueled by speculation of an imminent takeover bid. Until very recently, that's something that kept many investors interested in Twitter. The baseless acquisition rumors that had been circulating since 2016 were the only thing that motivated some investors to cling to Twitter stock, in the hopes that such companies as Disney (NYSE:DIS) or Salesforce.com (NYSE:CRM), would come up with an attractive purchase price.
This time, the good news is that there is no such scuttlebutt making the rounds. The two main metrics—user growth and revenue—which in the past had disappointed the Street, are actually the factors behind the stock's current momentum. And Chief Executive Officer Jack Dorsey’s strategy to push into live video and more personalized content is clearly paying off.
Though Twitter’s user figures aren't showing the kind of growth that one would call stellar, the number of people who use the platform every day is growing fast.Twitter's daily active user growth was more than 10% in the first quarter, marking the sixth consecutive quarter of double-digit growth in this key metric. This shows that more people are coming back to Twitter more frequently, and that matters a lot to advertisers.
Video content, the linchpin of Dorsey’s growth strategy, now accounts for more than half of Twitter's ad revenue and was the company's fastest-growing ad format during the quarter.
Doug Anmuth, an analyst at JPMorgan thinks the 2018 FIFA World Cup, the world’s most watched sporting event, will benefit the company's ad sales as a result of Twitter's "real-time highlights" and video partnerships. "We believe Twitter is uniquely positioned as the real-time broadcast and communications network, making it complementary to all other forms of media, including TV. Twitter is also well positioned to benefit from the large shift in dollars toward mobile and native," he said.
Perhaps most significant, Twitter is finally making money. The company turned its first-ever profit in the fourth quarter of last year and was also profitable in Q1, bringing in $61 million.
We think Twitter hasn't run out of steam. The company has a lot of good ideas to push growth further. It’s on the right track to increase its number of active users and turn the platform into one which advertisers increasingly value.
As its product continues to improve, we believe holding on to this stock is the right strategy. In our view Twitter is well positioned to expand its ad revenue next year.
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