After Blowout Q3, Twitter Earnings Ahead With Focus On User Growth

Last week’s solid earnings from Facebook, Inc. FB might have raised the stakes for Twitter Inc TWTR, a company in the same social media space reporting this Thursday.

FB’s quarter was arguably a pleasant surprise considering some of the controversies hanging over the industry. Now investors might be out there wondering if TWTR can ride the same wave. The company is expected to report earnings per share of $0.25, according to third-party consensus estimates, up from $0.19 a year ago. Analysts expect TWTR to report fiscal Q4 revenue of $869.5 million, up from $732 million the same quarter a year earlier.

When TWTR reported Q3 earnings back in October, the stock caught fire and rose more than 15% in a single day. If we go back to that point, analysts were expecting earnings per share of $0.15, and TWTR came in at $0.21. 

The stock price action since then hasn’t been as sparkling, but overall it arguably hasn’t been a bad few months for the social media company’s shares, which are up about 23% since the last earnings release. TWTR had a good quarter from an earnings standpoint in Q3 and there’s a lot of momentum in the space now, so the question might be whether TWTR can continue riding that. Analysts evidently expect good things, seeing that expectations for earnings per share moved up about 2% over the 30 days ended last Friday.

Shares Rose After Q3 Earnings Even As Monthly Active Users Fell

The major reasons analysts gave for TWTR’s rally after the Q3 report were better than expected earnings, revenue, and advertising growth. Missing from that equation was monthly active user (MAU) growth, which has failed to meet consensus expectations two quarters in a row. This metric actually fell sequentially in Q3, to 326 million from 335 million in Q2, the company said.

One possible reason for the Q3 sequential drop in MAU was TWTR taking action against some security threats that it, along with other social media companies, continues to face. It began work last year deleting so-called “locked accounts” as part of an effort to sweep “bots” off the platform. Investors might want to consider listening for an update on the company’s progress preventing spam or suspicious new account creation. A lot of accounts came down from FB due to “fake news,” and TWTR has done the same.

TWTR did expand its daily active users (DAU) in Q3 by 9% year over year. That was down sequentially, however, from 11% DAU growth in Q2, TWTR said. Investors might be watching that statistic in Q4 to see if growth continued or picked up.

Advertising revenue was another Q3 bright spot for the company, rising 29% to $650 million, TWTR said in October. More than half of ad revenue came from video ads. TWTR’s Video Website Card has been gaining popularity when an advertiser launches a campaign to promote a new product or service, “demonstrating the progress we’re making as we continue to earn must-buy status with advertisers on campaign launches,” TWTR said then in its press release.

Facebook Ad Results Might Have Raised Expectations For TWTR

Going into Q4 earnings season, some analysts had wondered if slowing global economic activity bit into advertising on social media platforms toward the end of 2018. Another concern was whether all the controversial privacy and security news that rocked FB, Alphabet Inc GOOG, and other Internet companies last year might cause advertisers to back off. 

However, FB last week reported a big jump in Q4 advertising revenue, with especially solid results in North America. That might raise some investor expectations going into TWTR’s earnings. 

It’s probably too early to look at FB’s results and say the social media industry is out of the woods. FB did take a lot of the necessary steps with privacy, and TWTR has also been working on that challenge. 

Another challenge for TWTR this quarter and throughout 2019 could be the tougher comparisons it’s starting to face. In Q3, for instance, TWTR’s 29% revenue growth represented a jump of $168 million from the same quarter a year earlier. 

To get to 29% in Q4, TWTR would have to grow revenue by more than $200 million. That would probably mean convincing advertisers to open their wallets even wider. Third-party consensus doesn’t see a repeat of the 29% growth, pegging Q4 revenue to rise 18.8% year over year.

Figure 1: Follow Up: Twitter shares (candlestick) have been climbing along with the S&P 500 (purple line) over the last few weeks, but still haven’t made it back to last year’s highs.  Data Source: S&P Dow Jones Indices. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Options Activity

As of Tuesday morning, options traders have priced in a $3.42 (10%) stock move in either direction around the coming earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Weekly option activity has been heavy at the 31-and 33-put strikes, and even heavier at the 36- and 38-call strikes. As of Tuesday morning, implied volatility was at 56th percentile.

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