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Stock Analyst Update

Twitter Reports Strong Q2; Ad Product Mix Is Improving

We're raising our fair value estimate, but we recommend new investors wait for a margin of safety before investing.

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Twitter (TWTR) reported excellent second-quarter results that exceeded our expectations and the FactSet consensus estimates. User growth combined with higher demand for brand advertising due to the current economic recovery, and the firm’s product enhancements and additional features which attracted more direct response advertisers, drove impressive top-line growth. We adjusted our projections higher as we believe such a mix of ad offerings will increase Twitter’s ad clients and their spending. In addition, some of the firm’s latest non-ad offerings could gain traction in the long run and slightly reduce dependence on advertising, while contributing a bit to revenue growth. Our higher projections resulted in a $58 fair value estimate, up from $52. We recommend new investors to wait for a margin of safety before investing in Twitter as the stock increased 6% in after-hours, trading at 1.27 times our fair value estimate, and 10 times and 35 times our 2021 sales and adjusted EBITDA projections, respectively.

Twitter posted total revenue of $1.19 billion, up 74% from the pandemic-ridden second quarter of 2020, with ad revenue up 87% to $1.05 billion and data licensing and other revenue up 13% to $137 million. The firm’s user count increased 11% to 206 million, with U.S. and international users up 3% and 13%, respectively. User growth, along with the economic recovery, attracted advertisers to the platform, which helped increase ad prices 42% from last year, accommodated by more ad supply (up 32%). We think this was driven mainly by the return of brand advertising, which represents around 85% of Twitter’s total ad revenue. We remain confident that the firm can create a more balanced mix of brand and direct response ad revenue.

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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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