Could Twitter’s share price bounce back on Q1 earnings?

Unlike the majority of so-called stay-at-home stocks, Twitter [TWTR] has had a tough time throughout the coronavirus outbreak. Could its Q1 report offer up a surprise lift for the company’s share price?

Twitter’s share price fell 23% in the first quarter and is currently down 10% from the start of the year (through 28 April) despite drawing bigger crowds on its platform as a result of the coronavirus pandemic.

The microblogging platform, which derives most of its revenue from digital advertising sales, is set to take a hit in revenue for Q1 as brands that are struggling with physical store closures and business uncertainties cut marketing budgets. For this reason, it issued a revenue warning towards the end of March. But what are the longer-term prospect for both company, and share price, performance?

While sales are likely to be down in the near-term, many experts believe that Twitter could end up in a better position overall after the dust has settled from the pandemic. So, are we likely to see optimistic signs for Twitter’s share price investors in the company’s Q1 report on Thursday?

Users are up

When reporting its revenue warning on 27 March, Twitter highlighted that usage on its platform surged as people around the world logged on to engage in conversation around Covid-19.

The number of what Twitter calls monetisable daily active users (mDAU) reached 164 million by the end of March, up 23% from the 134 million in the first quarter of 2019.

Such considerations have so far been largely ignored by Twitter’s share price investors, who believe that with a recession ahead, these users are unlikely to be shopping as a result of advertising activity on the platform.

Some, however, are starting to see the opportunity. In early April, Goldman Sachs [GS] analyst Heath Terry upped his rating on Twitter’s share price to buy from neutral, with a price target of $35.

“We believe the net impact of advertisers retreating, both as brands weigh the value of spending in a crisis and direct response sees conversions declining, while user growth surges globally as people look to stay informed and connected, has created an attractive entry point,” he wrote in a note.

“We believe as new/returning users see the value of the platform, many will stay as we’ve previously seen in more localised crises, creating future inventory that Twitter will be able to better monetise as the company invests in its ad technology through the crisis,” he added.

“We believe as new/returning users see the value of the platform, many will stay as we’ve previously seen in more localised crises, creating future inventory that Twitter will be able to better monetise as the company invests in its ad technology through the crisis” - Goldman Sachs analyst, Heath Terry

Falling behind FAANG

While Twitter was doing well at the start of the year — helped by Q4 results in February that showed revenue up by 11% and mDAUs increased by 21%  — it is now far behind some of its FAANG competitors.

Stocks such as Netflix [NFLX] and Amazon [AMZN] have all seen share price gains since the start of the year to 28 April, and largely profited from the lockdown rules. Facebook [FB], which is a direct competitor for Twitter’s digital advertising business, however, has also fallen by 10%.

While most of these competitors have benefitted from the majority of the public staying at home, much like Twitter, their models have been more suited to derive revenue from the situation. Twitter is mainly in this situation, according to Motley Fool writer Robert Izquierdo, because it refuses to diversify from its digital advertising model.

“If the company could diversify its business to reduce the reliance on advertising, it would be better insulated from these cyclical trends, but it has no plans to do so,” he says.

Instead, Twitter recently made the decision to share more data about its users to advertisers, which it hopes will help brands measure how their adverts perform on the platform and lead to more customers.

This hasn’t been enough to convince some investors to buy Twitter’s share price. JP Morgan [JPM] analyst Doug Anmuth cut his rating from overweight to neutral this month. "Twitter's near-term revenue decline could be steeper than for others given ad challenges coming into the crisis, heavy dependency on product launches/events/sports, and high exposure to brand advertising," he says. 

“Twitter's near-term revenue decline could be steeper than for others given ad challenges coming into the crisis, heavy dependency on product launches/events/sports, and high exposure to brand advertising” - JP Morgan analyst, Doug Anmuth

Outlook

Zacks Investment Research has noted that the consensus EPS forecast for Twitter’s Q1 report is $0.10. The reported EPS for the same quarter last quarter was $0.25, highlighting the mood among analysts.

The current consensus among 43 investment analysts polled by CNN Business is to hold stock in Twitter.