Before Twitter's second-quarter earnings report, there are clear signs of unease among investors. They aren’t sure whether its shares have more room to run after more than doubling in the past year.
Twitter (NYSE:TWTR) reports results before the bell Friday and analysts are predicting a quarterly profit of 16 cents per share, up from 5 cents per share in the year-ago period.
Revenue is expected to have risen to $697.85 million from $573.9 million.
The stock is down from a three-year high earlier this month. That caution is a typical problem that investors in high-growth companies face: how to distinguish between the real opportunities and the stocks that already reflect all the good news?
Twitter has been the best-performing stock among the high-octane technology names like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN). There are expectations the business has finally turned the corner. The company reported its first-ever profit in the fourth quarter of last year and it was also profitable in Q1.
The number of people who use the platform every day has also shown remarkable growth. 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.
Growth-Hungry Investors Can Be Satisfied
It’ll be tough, but we think Twitter’s growth momentum will continue well into the remaining part of 2018 and beyond. Twitter’s push to release more video content on its platform has been a real success and it’s attracting lots of advertisers. Video now accounts for more than half of Twitter's ad revenue and was the company's fastest-growing ad format during the last quarter.
In the last quarter, Twitter has signed more than 30 new partnerships -- including deals with Fox Sports, Comcast, Viacom and Disney -- featuring a ton of ESPN programming and a World Cup partnership. Industry insiders believe these deals uniquely positioned Twitter to benefit from the large shift in dollars toward mobile and native advertising.
Watch Operating Expenses And Margins
One area of concern is about the company’s ability to keep its costs down at a time when it’s aggressively pushing the video strategy. In 2017, Twitter did a great job containing its spending and operating expenses fell 21%.
We might see some pressure on margins due to rising costs at a time when social media giants are trying to appease regulators by purging their networks of fake accounts, political bots and hate speech. Twitter has suspended more than 70 million fake accounts in May and June. The company later said it’s conducting an audit to ensure that every account created on Twitter has passed a security check to prevent bots from gaining access.
Even after gaining more than 100% during the past year, Twitter shares are still only about halfway to their all-time high of $74.73 reached in December 2013. In order to continue this upward move, we think Twitter has to show significant revenue growth.
We think the company is on a right track to increase its number of active users and turn the platform into one that advertisers increasingly value. Any post-earning weakness should be a buying opportunity for those looking for a good entry point.