Twitter (TWTR) is often forgotten about due to the success of other social media companies. Yet in the past several years, alongside a stagnating stock price, TWTR has built a fortress balance sheet and created a cash flowing business. This creates an ideal setup for solid forward returns, even in the absence of new revenue streams. I expect TWTR to reward long term shareholders who are patient enough to wait to see what TWTR has in mind for the future of its platform. I rate shares a buy with 20% 12-month upside.
Twitter Stock Price
Depending on when you bought the stock, Twitter has either been a frustrating or exhilarating experience.
Those that purchased the stock during the pandemic crash have made multiples on their investment, while those that invested in the IPO have seen a volatile and largely unprofitable ride. But is the patience about to pay off?
Where Will Twitter Stock Be In 5 Years?
In the near term, Wall Street analysts do not appear very enthusiastic with the stock. Perhaps they too have been impatient shareholders.
(Seeking Alpha)
This is also evident in the target price of $72.18 which is barely above the current stock price:
(Seeking Alpha)
However, I am of the conclusion that TWTR will trade far higher in 5 years - perhaps 149% higher. Here's why.
Is Twitter A Good Stock To Buy As A Long-Term Investment?
While it may not have seemed entirely evident in past years, TWTR has since proven itself to be a social media staple, with a niche in being the fastest way to facilitate public communication.
TWTR has been moderately successful in monetizing its user base through targeted advertisem*nts. Roughly 85% of its advertisem*nts are related to boosting awareness and interest:
In spite of the dramatic growth in digital advertising in recent years, there still remains $210 billion of advertising spent on non-digital mediums such as TV and newspapers:
Of that digital ad spend market, TWTR estimates $150 billion to be its total addressable market. TWTR owns approximately 3% market share with plenty of room for growth even just within the digital advertising market. TWTR has guided for revenues to double to at least $7.5 billion by 2023:
Wall Street consensus calls for $7.56 billion of revenue in 2023, slightly higher than company guidance:
(Seeking Alpha)
That kind of growth rate is respectable for the current valuation of 10x forward sales, but is admittedly not mind blowing. Yet why am I so optimistic for TWTR stock? The thing is, the above guidance appears to mainly be related to growth in advertising. TWTR may be able to drive even more growth over the long term if it can roll out additional monetization levers such as enabling subscription payments from followers. It isn't too hard to imagine the appeal of being able to get exclusive tweets from certain Twitter users for a low monthly fee - with TWTR receiving a commission rate on any such fees. There may be even more potential ways to monetize their growing user base - the key is that the current valuation does not need any such idea to succeed. Think this is a pipe dream? Think again: TWTR alluded to the possibility of subscription and commerce products earlier this year.
Buying TWTR today is like getting the advertising business at a fair price with the free bonus of potential upside surprise.
Is Twitter Stock A Buy, Sell, Or Hold Now?
At recent prices, TWTR is trading at only 12x trailing sales and 10x 2021e sales. That isn't a commanding multiple for a company still growing at a 34% clip on a trailing twelve month basis. What's more, TWTR has $8.6 billion of cash & equivalents, or roughly 15% of the market cap. TWTR is generating cash flow, with $312 million in free cash flow in the first two quarters of this year alone. TWTR has even repurchased $495 million of stock this year. This is not the same risky cash-guzzling tech stock that it was when it came public 8 years ago. Based on $12.7 billion in estimated 2026 revenues, I can see TWTR trading at a multiple of at least 10x sales. I justify that valuation based on my projection of 30% long term net margins, and using a price to earnings growth ratio ('PEG') of 2x (Incidentally, this would place the price to sales multiple at 12x). That would place TWTR at $86 in 2023. That suggests 149% upside over the next 5 years, for a 20% annualized return. For a company with such a strong balance sheet and present-day positive cash flow, that kind of return profile is very attractive especially given where the broader market is trading. I rate shares a buy with 20% upside over the next 12 months.
Risks
All social media companies face existential risk. It is possible that Facebook (FB), or another social media company manages to reduce TWTR's relevance through competing capabilities. Given that TWTR grew its monetizable user base by 3.5% sequentially in this past quarter, there is not yet evidence of such threats.
TWTR might not successfully implement new features, or even its existing advertising business. Even though TWTR has showed strong growth in the recent quarter, it was only a couple of years ago that revenue growth was nearly nonexistent. The current financial position protects a lot of the downside, but clearly the stock has room to fall if growth disappears.
Much of my thesis revolves around the strong balance sheet and cash flow generation. If TWTR squanders the cash on value-destroying acquisitions, then the stock may suddenly present elevated risk. The current valuation is not reflective of a stock with elevated risk, and I would expect a substantial re-rating downward to occur in such a scenario.
Conclusion
While TWTR is not growing as fast or producing as much cash as Facebook, there is an attractive investment thesis through its core advertising business coupled with the possibility of new revenue streams. While the company is not currently generating strong profit margins, I expect operating leverage to eventually lead to strong bottom line growth that far outpaces top line growth. The stock appears to have a clear path to more than doubling over the next 5 years, even in the absence of multiple expansion. There could be even more upside if the company is able to successfully introduce new business lines like subscriptions or commerce. I rate shares a buy with 20% upside over the next 12 months.
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