Rebased Expectations: TWTR's 4Q13 Earnings Release exposed holes in 2 of its 3 growth drivers (user growth and engagement); continued weakness on both these fronts may be the expectation moving forward.
- Near-Term Upside: While we believe the runway for its largest growth driver (monetization) is shorter than the street expects, it remains a considerable near-term growth driver as the mobile migration should drive upside to estimates in 1H14.
- Downside Catalysts Too Far Out: Now that the holes have been exposed in 2 of its 3 growth drivers, we do not see a near-term downside catalyst till monetization begins to materially slow, which we do not expect to occur until 2H14.
- Better Entry Point to Emerge: We see an asymmetric setup to the upside into the 1Q14 release, and suspect that consensus estimates and the stock could move higher near-term on refueled optimism. That said, we're getting out of the way for now, but expect a better entry point will emerge on the short side in the next 1-2 quarters.
SUMMARY CHARTS SERIES
User Growth: Significant Slowdown in US User growth. We suspect TWTR's US penetration is much higher than its MAU metrics suggest given that some users have joined and are no longer inactive. Runway is shorter than many expect.
Engagement: Decelerated considerably in 4Q13. Management suggested this is partly due to Twitter interface improvements, but we believe users migrating to TweetDeck is also to blame. We suspect the latter could a secular theme, which would pressure ARPU.
Monetization: the Mobile Migration may have more immediate upside than we originally thought, although we suspect some of the 4Q13 acceleration is due the holiday shopping season.
Hedgeye vs. Consensus: We see upside in the near term to consensus estimates, but we expect ARPU growth to materially slow beginning 2H14 as the mobile tailwind begins to subside. With mobile now representing over 75% of all ad revenue, the comp setup switches from mobile representing the minority to the majority of revenue moving forward.
We provide more detail on our short thesis in our most recent note below. If you would like to see additional work, or discuss in more detail, let us know.
TWTR: Staying Short, But...
02/07/14 04:55 PM EST
Hesham Shaaban, CFA