KEY POINTS
- 2015 WILL BE A CHALLENGE: We’re expecting 2015 revenue growth of 51% vs. consensus of 66%. Outside of the obvious World Cup comp headwind in 2Q15/3Q15, we suspect TWTR’s largest source of revenue growth since 3Q13 (Ad monetization) will be under pressure with the 2Q13 Supply Shock largely in the rearview mirror. Further, efforts to reignite that growth driver could push its users away.
- BUT WE'RE SOMEWHAT CAUTIOUS INTO THE PRINT: First, we're not sure how TWTR will approach guidance (lower the bar vs. hope for the best). Second, it wouldn't take much user growth to produce an accelerating y/y growth rate for US MAUs given an easy y/y comp and the embedded aesthetic tailwind from third-party/automated accounts. That alone could refuel optimism on a beaten-up stock. However, we suspect any near-term upside would be short-lived.
2015 WILL BE A CHALLENGE
We’re expecting 2015 revenue growth of 51% vs. consensus of 66%. In addition to the obvious World Cup comp headwind in 2Q15/3Q15, we suspect TWTR’s largest source of revenue growth since 3Q13 (Ad monetization) will be under pressure as well.
We had previously laid out our analysis which suggested that TWTR’s monetization strategy has been driven by surging ad load more than anything else. In short, we believe that the reported change in TWTR’s ad engagements is a proxy for increasing ad supply, since ad engagements and ad pricing are almost perfectly inversely correlated.
For more detail, see the link below
TWTR: What the Street is Missing
05/19/14 09:09 AM EDT
Back in 2Q13, TWTR experienced its sharpest q/q increase in ad engagements alongside is sharpest q/q decline in ad pricing; collectively what we refer to as the “2Q13 Supply Shock” , which had propelled TWTR’s y/y revenue growth through 1H14.
However, the rate of ad engagements has essentially slowed to pace of overall user activity on the site (global timeline views). We initially thought that TWTR had slowed the pace of ad load increases, but it could be that users have started to fade TWTR’s ads at an increasing pace.
If the latter is the case, TWTR would need to increase ad load at a disproportionately higher rate to receive the same level of engagement. However, that creates the risk of pushing its users away; the perverse inverse relationship between TWTR's ad engagements and US MAUs suggests as much.
but we're somewhat cautious into the print
First, we're not sure how management will approach guidance. TWTR could guide high and hope for the best, especially since it recently raised $1.8B ($3.6B total cash) that can use to acquire inorganic growth down the stretch. However, the street expectation is for ongoing beats and raises, so lowering the bar now would be the prudent approach, especially with Costolo's jobs seemingly on the line. We're expecting light guidance, but no telling how management will approach it.
Second, It will not take much net user growth to produce an accelerating y/y growth rate for US MAUs. Anything over 1.5M net new US MAUs will produce y/y growth in excess of the 19% reported in 3Q14 (TWTR has averaged ~3M net ads since 1Q14). It's important to note that TWTR has an embedded aesthetic tailwind on its MAU growth from third-party accounts, the majority of which from automated accounts with no discernible user activity. Any upside on MAUs could rekindle optimism in the name.
That said, there is more risk to being short the print than we would like, but we suspect any near-term upside would be short-lived.
Let us know if you have any question, or would like to discuss in more detail.
Hesham Shaaban, CFA
@HedgeyeInternet
