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Twitter Inc (NYSE:TWTR) stock is flying high since its last earnings release. Will 2018 be the year of TWTR stock?
Shares of the online news and microblogging platform Twitter Inc (NYSE:TWTR) have soared to two year high on the back of analyst upgrades and improving investors sentiment. The turnaround in TWTR stock started after its third-quarter earnings release. The stock is up a whopping 46% since then. The anti-harassment measures also seemed to have given a boost to investor sentiment. JP Morgan, one of the two investment houses which have upgraded Twitter stock, has gone as far as to say that it is one of their best ideas for 2018. Has the fundamental picture of Twitter shares changed that much to be so bullish about it? Should you bet on TWTR stock in 2018? We would suggest investors take a cautious approach. Here's why.
Can Twitter Inc deliver in 2018?
The market seems to have taken the commentary of Doug Anmuth of JP Morgan who raised his price target on Twitter from $20 to $27 earlier this week, very seriously. Anmuth in his note to clients wrote that the Jack Dorsey co-founded company could see an 8.6% increase in advertising revenue in 2018. According to him, 10% rise in daily average users, product and platform improvements along with a rise in demand would be the driving factors. Jonathan Kees of Summit Redstone was the latest to join Anmuth who has started by initiating a buy call on Twitter with a $26 PT. Kees went as far as saying that "now is the time to jump in as user growth and engagement traffic have stabilized and even started growing." Twitter is working hard to improve user engagement starting with the increase in tweet character limit to 280 characters. And, most recently the social media company introduced a new enterprise API to help boost customer engagement.
Having taken into consideration of all the arguments cited by the Wall Street analysts and the measures taken by the company to improve the product, we still believe investors should take the bullish arguments of the above analysts with a pinch of salt. Both analysts hinted at decent revenue growth in 2018. However, the findings of an emarketer research report suggest that it could be a daunting task in 2018. On an average, the advertising revenues make up more than 85% of Twitter's quarterly revenues. As you can see from the image above, the US advertising revenues account in the range of 50% to 60% of the total advertising revenues over the last 5 quarters. Any negative impact on US advertising revenues could impact the company's revenues in a big way. Now, in an emarketer report titled "Beyond the Duopoly: Exploring Digital Advertising Outside Google and Facebook.", the research agency suggested Twitter's share of US advertising revenue would fall going ahead in 2018 and 2019.
In fact, the social media company which was at the 4th place in the rankings for non Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL) US digital ad revenues share by the company in 2017 is expected to lose its position to Snap Inc (NYSE:SNAP) owned Snapchat. The report suggests that Twitter's US digital ad revenue share will fall from 4% in 2017 to 3.6% in 2018 and will slide further to 3.4% in 2019. This certainly is not a good sign for the company. At this juncture, it is too early to guess whether the international advertising revenue and data-licensing revenue can offset any fall in US advertising revenue. On top of it, this report in a way contradicts bullish thesis of Wall Street analysts. The fiscal fourth-quarter earnings should give us a better picture of which way Twitter is heading.
Twitter stock rally may soon come to a halt.
The prospect of GAAP profitability in Q4 looks promising but Twitter stock has still a long way to go. Twitter stock is presently trading at a forward earnings multiple of 55 which is almost double the multiples of Facebook and Google parent Alphabet who have better earnings growth than Twitter. Coming to the recent rally in Twitter shares, the rally may be losing steam if you go by TWTR stock technical chart. The stock is in the overbought zone as per popular technical indicators, Relative Strength Index (RSI) and Bollinger Bands. The current RSI reading stands at 80.77, well above the commonly used overbought threshold of 70. The share price has also breached the upper Bollinger Band to signal an overbought condition. And, generally, the combination of these two indicators is considered as a strong signal.
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