Trading Analysis: Twitter Earnings Preview
By Colin Cieszynski, CFA, CMT, Chief Market Strategist and Jasper Lawler, Market Analyst, CMC Markets
Twitter is scheduled to report earnings after US exchanges close on Thursday February 5th.
Twitter shares surged as much as 6% on Tuesday, just two days ahead of its official fourth quarter earnings release after the social media giant announced it will sell ads outside of its platform to third party vendors.
Slowing user growth and a lack of profitability have been amongst the biggest concerns for shareholders who have been exiting the stock since its peak in December 2013. The move to put ‘promoted tweets’ on third-party sites and apps could address both by providing an additional income source as well as reaching out to new users on other platforms.
Having made steady progress at decreasing the size of quarterly losses, Twitter is expected to make a pre-tax profit of $45.27m in the fourth quarter of 2014.
If Twitter can report evidence of acceleration in daily and monthly active user growth on top of pre-tax profits and the just-announced rejuvenated plans for monetisation, shares could have a lot of upside potential.
The street is expecting Twitter to report adjusted EPS of $0.06 for the quarter on sales of $453M. Last quarter, Twitter posted adjusted EPS of $0.01 which was in line with expectations on sales of $361M which beat the $350M street estimate.
As a relatively early stage growth company that is just barely profitable on operations, Twitter trades at a very high multiple (76X forecast EPS) as traders expect its high growth to continue and earnings to eventually catch up to the stock price. Should there be any hiccups in sales, earnings or guidance, however, the shares could be punished severely as we saw after the last earnings report back in October. On the other hand, the chart below shows that there appears to be lots of room to rebound should the company surprise to the upside.
Data Source: Bloomberg L.P.
Source: CMC Markets
A spring and summer rebound in Twitter shares ended in dramatic fashion last October with the drop from the high $50s to the mid$30s, with a big gap down after its last earnings report.
The shares finally stabilize above $34.75 and for the last three months they have been range bound, trading between there and $40.75. Over this time, a rising RSI has shown a steady change in momentum from downward to upward.
Currently, the shares are near the high end of their channel. On a breakout, a Fibonacci level near $42.80 could be tested initially followed by a measured move and Fibonacci cluster in the $45.50 to $47.00 zone.
Should the shares falter and turn lower, channel support may appear initially followed by previous lows near $32.75.