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Twitter's Valuation Is Becoming More Attractive


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Micro-blogging platform Twitter  remains a very volatile stock, and the company's stock price saw a recent pullback of more than 50%. Twitter's stock price was extremely overvalued when it was in the 70s, but now represents a far more attractive investment.

There were unrealistic expectations surrounding Twitter's long-term value, with many investors and analysts drawing scenarios of Twitter becoming the next Facebook . However, that is not the case. Twitter does represent a good platform where advertisers can reach digital-savvy users.

Valuation more attractive
Public market valuations of Twitter had heightened expectations as overly bullish investors were anticipating that Twitter's 255 million monthly users could match Facebook's global scale of 1.3 billion users. That is unlikely to materialize, however, and expectations of the company have been reset. 

Twitter should see substantial revenue growth and margins should meaningfully expand as the company's pre-IPO stock compensation expenses are expensed on its financials. Twitter saw its revenue growth reaccelerate for two consecutive quarters; if the company can sustain revenue growth at more than 110% for a few more quarters, then the company will have a much larger revenue base. 

Twitter's shares got hammered after the last earnings report came out because investors got spooked about the company's user growth and engagement. Investors clearly overlooked the company's fantastic revenue growth, though. Twitter's user engagement was down as measured in terms of timeline views per users, both in the U.S. and also outside of it. However, Twitter's user growth increased 25% year-over-year, and Twitter's average revenue per user (ARPU) is on the upswing. Twitter might not get to more than a billion users like Facebook, but it is a great broadcasting platform due to its real-time nature.

Monetizable platform
Twitter has a reasonably light ad load on its platform compared to Facebook. It can ramp up the number of ads on mobile devices, as 78% of its total usage is coming from mobile. Twitter can also grab a sizable chunk of the growing mobile advertising platform. Advertising on social media is still a portion of the total advertising pie as well, and one that should grow substantially bigger over time. 

Total advertising spending on mobile is estimated to be $31.5 billion in 2014, according to market research firm eMarketer. The leaders in the space are Google  and Facebook, and these two firms are expected to control close to 70% of the mobile advertising market in 2014. Google being the leader in search and mobile OS through Android is expected to have 47% of the market in 2014, while Facebook is at a distant 22% market share. 

Being a much smaller company relative to Google and Facebook, Twitter should have 2.6% of all mobile advertising spends worldwide, according to eMarketer. Twitter is increasingly making itself a more monetizable platform through other means, however.

Twitter's acquisition of mobile ad exchange MoPub has given the company a solid position for benefiting from growth stemming from in-app advertising. The company has now made another acquisition in the form of Namo Media to complement MoPub's position in mobile app monetization. These initiatives, coupled with growth in mobile ad spending by marketers worldwide, should aid Twitter to grow its annual ARPU from $3.35 to much higher levels. It will probably take Twitter closer to Facebook's trailing twelve month ARPU of $7.46 as well. 

Going forward
Twitter is a niche social media platform, but it still has a lot of room for user growth. In the U.S. it has 57 million users, and internationally it has 198 million users. As a result, there is room for more user penetration across the globe. 

Twitter doesn't need to be the size of Facebook to deliver solid revenue and earnings growth. The company's operating margins should expand dramatically after the IPO stock comp costs are expensed fully. Twitter currently trades at 9.5 times its 2015 revenue estimates of $2.04 billion, and that multiple should expand and drive upside in the company's stock price.

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The article Twitter's Valuation Is Becoming More Attractive originally appeared on Fool.com.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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