Goldman Sachs recently raised its price target for Twitter (TWTR) amid its large scale purging of fake accounts and push to improve the quality of info. Ironically, that purge of accounts and some subsequent bad press actually drove the stock down. For stocks, I look at things from an earnings perspective. The only time I care about this sort of news drama is in terms of how it might affect earnings. Goldman analyst Heath Terry has a price target of $50 based on the company's efforts to monetize user engagement.
Like other social media stocks, Twitter is about user growth, and the subsequent advertising revenues it can achieve. After years of losses, the company has finally found profitability from those revenues. In the fourth quarter of 2017, Twitter reported net income of $91 million. That broke down to $0.12 per diluted share. In the first quarter of 2018, Twitter reported net income of $61 million, or $0.08 per diluted share. Obviously relative to past performance these numbers are fantastic.
My concern with the recent stock run is that it is outpacing the actual growth of those earnings. Estimates seem to be putting full year earnings at around $0.76 a share. That would give TWTR a P/E ratio around 67 times its forward earnings if the stock hits $50 a share. I'm sorry, but that's an expensive valuation for nearly any stock. One needs to remember that share counts are still climbing. Between Q4'17 and Q1'18 shares outstanding increased 6% to 765.86 million diluted share outstanding. Though marginally small, that will dilute the stock price. I'm not bearish on the company as a whole, but these factors need to be remembered.
Is Twitter finally getting its groove? Yes it is. Will it likely keep turning some profits? It certainly seems that way; but the profits definitely don't justify these share prices. This is perhaps one of the biggest problems with tech stocks these days. They are ballooning to unsustainable levels. Twitter's future potential is largely already baked into the stock price. I think a large portion of what's happening here is psychological. Investors have waited a very long time for Twitter to start producing earnings. Now that it's finally happened the stock got hot really quickly and outpaced the earnings actually being produced.
With the way the market is beginning to show signs of declines, I worry that high priced avenues such as Twitter are a dangerous game. I'm happy for the souls that owned it prior to Q4'17. They've definitely made a hefty profit on their investment. At this point, I think the smart money takes profits. I think Twitter as a company will continue to do well, but the growth expectations don't match up with what's been happening with the share price.
So since I've undoubtedly angered a great many Twitter investors with this story, what do I think is a good price for Twitter? I personally feel you have to watch its counterparts for that answer. Facebook (FB) is trading with a P/E in the 30-40 range, and it is a much better company in terms of financial performance. They've been profitable, and had time for the market to create a valuation range. Tracking that sort of valuation (which still feels high to me), Twitter is more realistic around the $26-$30 range. If they achieve their full year earnings of $0.76 a share that would give them a valuation worth 35 times their earnings. That's a far more reasonable price for a stock that until recently, has had very little to show for it.
Might the stock hit $50 amid all of the latest price targets from players like Goldman? Sure, but at this point you're chasing the rally, not riding it. If stocks follow earnings over the long term, which I believe they do, Twitter is due for a slight pullback sometime this year. They're doing well, but they're not doing THAT well.