Is Twitter’s share price about to breakout?

For all the talk of September's tech rout being driven by inflated valuations, Twitter’s [TWTR] share price has since gone on to hit new highs. The stock recovered from its September low of $38.10 to hit $48.65 on 12 October, its highest intra-day trading price since April 2015. Could Twitter’s share price go even higher following its third-quarter earnings report on 29 October?

Twitter’s share price has more than doubled since its March market sell-off low of $20, which it dropped to on the 18 of the month. As of 27 October, Twitter’s share price at $51.27 was up 59.9% since the start of the year. 

Based on Twitter’s share price performance leading up to its second-quarter earnings announcement on 23 July, the stock could be set for another post-earnings bounce. Twitter’s share price gathered momentum during the month to its Q2 report, rallying 29%.

Advertising revenue hit weighs down earnings

However, these earnings results were slightly disappointing and weaker than expected.

Total revenue for the three months to the end of June was $683m, down 19% on the $841m posted in year-ago period. The social media platform had added more monetised daily active users in the quarter, but this didn’t appear to help, and the results were also lower than the $707m analysts had been expecting, according to Refinitiv data. The company posted a loss of $1.39 per share, following a net loss of $1.2bn.

Twitter’s advertising revenue took a big hit as a result of businesses slashing global advertising and marketing budgets due to the coronavirus pandemic. Revenue for the segment was $562m, a decline of 23% year-over-year.

Advertising revenue is set to improve in the upcoming quarter though.

While there was reluctance from brands to spend on advertising due to the civil unrest that was taking place in the US earlier in the summer, the slight return to pre-pandemic economic activity is expected to deliver more revenue in the quarters ahead. The gradual improvement in ad spend was already starting to become evident in the last three weeks of June, according to the company.

The social media giant didn’t provide any guidance for the upcoming quarter but on the second-quarter earnings call, Ned Segal, CFO at Twitter, said there were lessons to be learnt from the subdued economic activity experience.

He hoped that the return of live events would lead to sponsorship and advertising content opportunities. “We expect expenses in Q3 to grow 10% or more and to grow CapEx, but the environment remains uncertain,” Segal added.

Of the analysts polled by Zacks Equity Research, the average forecast for Twitter’s third-quarter revenue is $765.3m, which would represent a 7.1% decline year-over-year. Earnings per share are expected to be $0.06, which would be down from the $0.17 it had posted in the year-ago period.

Improving ad channel lifts outlook

Beyond third-quarter earnings, Lloyd Walmsley, a Deutsche Bank analyst, sees strong potential for advertising revenue to recover and room for the share price to rally going into 2021. As reported by Barron’s, in a very bullish move earlier this month, he upgraded his rating for Twitter from hold to buy and raised his price target significantly from $36 to $56.

“In our view, Twitter is well-positioned to benefit from a big event landscape in 2021, expansion into more performance advertising on the back of its ad server rebuild and new MAP [mobile app promotion] product, and an eventual high-margin subscription product,” he wrote in a note to clients.

“We have been excited about the medium-term prospects for Twitter but unable to get more bullish given weak advertising channel feedback. We are now starting to hear more positive feedback in the ad channel and would take advantage of the opportunity to build a position now before a stronger ad recovery takes hold and we get into the period of 2021 excitement.”

“In our view, Twitter is well-positioned to benefit from a big event landscape in 2021, expansion into more performance advertising on the back of its ad server rebuild and new MAP [mobile app promotion] product, and an eventual high-margin subscription product” - Lloyd Walmsley, Deutsche Bank analyst

Walmsley’s view doesn’t appear to be one shared by all analysts, however.

Among the 37 analysts polled on MarketBeat, 11 rate the stock a buy, 22 a hold and four a sell. The consensus price target is $38.08 would make for a 25.7% decline on Twitter’s share price as of close on 27 October.