Get A Second Chance At This Tech IPO

Marshall Hargrave's picture

Wednesday, April 30, 2014 - 9:45am

by Marshall Hargrave

With the tech stocks having taken a beating over the past month, a number of interesting buying opportunities are out there for long-term investors. And it's not every day you get a second chance to invest in an IPO.

That's because it's unusual for a company to trade below its IPO price less than six months after debuting in the public markets. However, shares of Twitter (NYSE: TWTR) are now trading below the closing price from their IPO debut. 

TWTR has been hammered this week since the company reported first-quarter earnings -- shares have fallen to well below $40 a share as of this writing. The prime factor in the plunge may be that the quarter was the fourth in a row in which Twitter saw slowing growth.

Analysts and investors have also focused on subpar engagement metrics. Total monthly active users came in at 255 million for the quarter, below expectations of 257 million, and Timeline views totaled 157 billion, compared with the consensus estimate of 165 billion. 

However, the quarter wasn't all that bad. Revenue and EBITDA (earnings before interest taxes depreciation and amortization) beat estimates, and Twitter's forecasts for the second quarter and full year were in line with analysts' expectations. The year-over-year growth in total monthly active users and Timeline views came in at 25% and 15%, respectively.

One of the big positives from the quarter is was that Twitter's ad sales continue to gain strength. Toward the end of 2013, Twitter introduced a flurry of new products to increase ad revenue. Thanks to these, ad revenue came in at $226 million, which beat expectations of $220 million and represented increases of 125% from the same period last year and 121% from the previous quarter. 

Twitter has settled into pattern of mature growth. Investors have obviously taken this as a sell signal -- but assuming Twitter continues to find new ways of monetizing its nearly quarter-billion monthly active users, this could be a buying opportunity.

Twitter's plunge this week is the product of a perfect storm of negative news. Compounding the negative reception to its earnings is the fact that Twitter is one of the top momentum and high-growth stocks, and this sector has been beaten down over the past month. Even the sector's biggest names -- (Nasdaq: AMZN), Google (Nasdaq: GOOG) and Facebook (Nasdaq: FB) -- are down 10% or more over the past month.

The next big hurdle is the lockup expiration (where insiders can sell shares that they couldn't at the IPO) on May 5. This is Twitter's first major lockup expiration. Key insiders will be able to sell 500 million shares, but many of Twitter's key insiders -- including CEO Dick Costolo and co-founders Evan Williams and Jack Dorsey -- have said they'll be holding on to their shares. 

  Twitter has settled into pattern of mature growth. Investors have obviously taken this as a sell signal -- but assuming Twitter continues to find new ways of monetizing its nearly quarter-billion monthly active users, this could be a buying opportunity.  

The biggest question mark for Twitter is its ability to attract users and keep them engaged. Twopcharts, a third-party site that tracks usage on Twitter, has found that 44% of Twitter's accounts have never sent a tweet. But Twitter is looking to change this: It has revamped its look and feel, making it similar to Facebook, and made photo tagging easier. 

The near-term pressures are overshadowing some of the long-term growth opportunities that Twitter is yet to embark on. First of all, Twitter has been flying under the radar when it comes to acquisitions. 

Its latest acquisition was Gnip, a reseller of Twitter data. This acquisition should increase Twitter's data licensing revenues, which made up 10% of total revenue in 2013. Twitter also recently acquired Android lock-screen app Cover. 

Twitter has also acquired two European TV analytics firms this year; it already owned the top two U.S. TV analytics firms, Trendrr and BlueFin Labs. Twitter's connection to television is one of the key growth opportunities. It should have no problem signing up brands that are looking to target large TV audiences. 

Twitter's growth story is not just about attracting users but advertisers as well. The global mobile ad spending market is expected to grow to $32 billion in 2014, which is over a fourth of the total digital ad spending worldwide.

Less than a year ago, Twitter started allowing brands to target users with images and videos. And the company still has a number of things it can do to encourage more advertisers to trade in Facebook for Twitter. This includes offering tailored audiences, conversion tracking, and tailored TV conversations to advertisers -- in addition to the company's own e-commerce initiatives. 

Shares of Twitter are trading at a price-to-earnings (P/E) ratio north of 170 based on next year's projected earnings. But even LinkedIn (NYSE: LNKD), one of social media's success stories, traded at a P/E of over 500 just a couple of years ago. Since LinkedIn's IPO in 2011, LNKD is up over 80%, which is more than double what the S&P 500 Index has returned in that time. 

Twitter could also grow into its valuation, much like LinkedIn has. Twitter's earnings growth expectations are quite impressive. Analysts expect earnings to come in at $0.02 a share this year -- but grow 11-fold in 2015, to $0.22. 

Risks to Consider: The competition for ad dollars is intense, where Twitter is going head to head with the likes of Facebook. Twitter also relies heavily on mobile, where mobile ads account for over 70% of revenues. And TWTR is still a very expensive stock, yet to generate positive earnings. This makes the stock very volatile and susceptible to large sell-offs. (My colleague David Sterman has been keeping a close eye on Twitter.)

Action to Take --> Investors with a high risk tolerance should consider buying Twitter. Shares are off more than 40% their all-time high, and investors can pick up the stock near its IPO debut price.

P.S. If you think Twitter's found a bottom, you may be interested in a new income-multiplying strategy developed by my colleague Michael Vodicka. With his method, investors can turbocharge the income generated by the world's most reliable dividend payers -- all without buying a single share. To learn more, click here now.

Marshall Hargrave does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.