Twitter: High Valuation and Regulatory Threats Lead To A Volatile Outlook From Analysts
The social media space continues to be a volatile place for investors to consider awhile now. During the last several years, we’ve seen anti-trust and regulatory fears surrounding the industry. During the last two Presidential election seasons, social media companies have been in the cross hairs of the traditional media, as well as the legislators on Capitol Hill, due to beliefs that they’re unfairly censoring free speech, while at the same time, not censoring extremism and disinformation well enough. What’s more, internet regulation, as a whole, has been brought into the spotlight, due to the fact that there hasn’t been major internet reform legislation passed in decades and many lawmakers fear that the big-tech companies have garnered too much power. All in all, companies like Twitter (TWTR), have been plastered all over the financial news headlines recently, with the majority of the headlines being negative.
Just last week, Twitter CEO, Jack Dorsey, was involved in a 6-hour virtual meeting with the House Committee of Energy and Commerce, alongside the CEOs of Alphabet (GOOGL) and Facebook (FB), as lawmakers discussed internet reform and social media regulation.
The meeting was a fiery one, with committee chairman, Frank Pallone Jr., a Democrat from New Jersey, making very disparaging comments in his open remarks. Pallone said, “It is now painfully clear that neither the market nor public pressure will force these social-media companies to take the aggressive action they need to take to eliminate disinformation and extremism from their platforms. And, therefore, it is time for Congress and this Committee to legislate and realign these companies’ incentives to effectively deal with disinformation and extremism.”
Lawmakers, industry leaders, and spokesmen from various special interest groups made comments during the meeting, which shined light on various perils of the current social media landscape. Legislators blamed the social media CEOs for the part their platforms played in the violence that we saw in Washington D.C. on January 6th during the insurrection at the Capitol Building.
Healthcare groups touched upon the fact that social media platforms are allowing unfounded anti-vaccination rhetoric to flourish, which is putting major hurdles in the path towards ending the COVID-19 pandemic.
Other racist and violent acts were attributed to the social media platforms and there were numerous calls to repeal Section 230, which is the legislation that grants social media companies protection from the content that their users generate.
The repeal of section 230 presents a great deal of uncertainty to the social media industry. It could totally upend the business models that the social media names have found success with in the past. And, while others argue that increased regulation on the space will actually be good for the current market leaders because it will lead to less competition from upstarts (due to the large capital requirements of meeting regulatory standards), uncertainty is never a good thing for share prices, which is why we’ve seen increased activity when it comes to the coverage of Twitter in recent weeks.
What’s more, these pressures aren’t just happening in U.S. markets. Last week, Twitter was criticized by Russian officials for its non-removal of banned content. Anusuya Lahiri, staff writer at Benzinga, reported that while Twitter believes that such bans would negatively impact free speech, officials in Moscow are threatening to ban the service within its borders and have already slowed the website’s speed down, as an act of retaliation.
All in all, when tracking the analysts, journalists, and bloggers who’re given 4 and 5-star ratings with the Nobias algorithm, we see that there is a bearish lean within the recent commentary. During the last month, we’ve seen 16 bullish reports published, 4 neutral reports published, and 27 bearish reports published. These “sell” ratings appear to be due to the ongoing uncertainty regarding regulation and the speculation that it causes and not the company’s growth prospects.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Calum Muirhead, a Nobias 5-star analyst who writes for Proactive Investors, recently published an article highlighting an SEC filing which presents Twitter’s future growth plans. In his piece, Muirhead notes that Twitter shares moved higher after the company announced a three-pronged plan when it came to growth oriented goals.
Muirhead said Twitter’s goals include, “doubling its development velocity by the end of 2023, meaning it will double the number of features shipped per employee that directly drive either its monetizable daily active users (mDAU) or revenue.” He said that the company hopes to “reach at least 315mln mDAU by the fourth quarter of 2023, representing a compound annual growth rate of around 20% from the base of 152mln mDAU reported in the final quarter of 2019.”
From a fundamental standpoint, Muirhead says that Twitter hopes to increase its revenues “to US$7.5bn for 2023 from US$3.7bn in 2020.” He continued, saying “Twitter also reiterated its long-term margin target of mid-teens GAAP operating margin, or 40-45% adjusted earnings (EBITDA) margin.”
These increased revenues and steady margins should allow the company to grow its bottom-line as well. Right now, the consensus analyst estimates for Twitter’s earnings-per-share growth in 2021, 2022, and 2023 come in at 205%, 29%, and 38%, respectively.
Now, even with these strong growth prospects in mind, Twitter’s valuation still presents a headwind to many investors. At the stock’s current share price of $61.26, shares are trading with a forward price-to-earnings multiple of 67.3x when compared to the consensus 2021 estimate of $0.91/share on the bottom-line.
This is a lofty premium, even for a company expecting to produce a 26.5% CAGR on the top-line. With that being said, with these valuation concerns in mind, it appears that Twitter’s general outlook will remain negative until investors find clarity from a regulatory standpoint.
Disclosure: Nicholas Ward has a long position in Alphabet (GOOGL) and Facebook (FB). Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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