KEY POINTS
- LONG THESIS SUMMARY: We believe TWTR's model is now built for sustainable growth after right-sizing its model in 2017 while pivoting away from its legacy CPC ad products. We expect TWTR to return to double-digit if not +20% ad revenue growth during 2018 as the legacy CPC drag wanes through the year. We saw early validation of our thesis on the last print with TWTR returning to ad revenue growth in its core O&O segment on declining legacy CPC ad load (our estimate). Further, TWTR should see incremental advertiser demand this year from the Olympics, World Cup, and mid-term elections. We also suspect that FB's recent issues (news feed/data protection) could wind up shifting some ad budget toward TWTR, but that's more of a hunch and not central to our thesis.
- THOUGHTS INTO 1Q18: We expect TWTR to return to double-digit ad revenue growth in its core O&O segment in 1Q18, and potentially imply +20% revenue growth in the high end of its 2Q18 EBITDA guide. On DAUs, we estimate that TWTR needs to add about 3M DAUs q/q to maintain double-digit y/y growth, which we believe is within reason considering it picked up 2M q/q (est.) in a seasonally weaker 4Q17, and the Olympics should provide an additional tailwind. We also expect TWTR to directly address what we see as misplaced concerns around its Data Licensing segment in its 1Q18 Investor Letter, which should help relieve some of the recent pressure on the stock.
- MONITORING CONSENSUS: It appears that the sell-side is starting to catch up with our thinking. Consensus estimates for the next 3 quarters have from shifted from low-single digit to ~10% ad revenue growth since TWTR's 4Q17 release. Note that ~80% of the sell-side is still hold/sell rated, so there's still ample room for an upgrade cycle, but also a heightened risk of estimate hacking at the same time. For context on the latter, consensus 1Q18 EBITDA estimates are above the high end of TWTR's guidance despite the bearish tilt in ratings. We'll be keying in on consensus post print.
Let us know if you have any questions or would like to discuss in more detail.
