This Stock Has the Potential to Double

Shares of Twitter (NYSE: TWTR) have been slammed lately after weak user growth and an inability to monetize its platform led investors to question the future.

The big move in shares of the 140-character social giant is nothing new. Shares have moved higher or lower by 20% or more in one week three times in the past year.

[ad#Google Adsense 336×280-IA]The concern is that Twitter has yet to effectively monetize its massive user base and that growth in monthly active users (MAUs) may be slowing.

The concern over social media monetization is also a familiar story. It was the same issue that led a 53% nightmare in shares of Facebook (Nasdaq: FB) during its post-IPO 2012 plunge, but has turned into 550% return since August of that year.

Can Twitter do the same or should investors be worried? Turns out, higher revenue might not be far away, and the company may be hiding a secret user base that dwarfs reported users. Shares could be set to jump as early as this fall with the potential to double.

Twitter’s Secret Users And Real Power Of The Platform

Even as the company reported a 36% increase in quarterly revenue and adjusted EBITDA growth of 73% over the same quarter last year, shares of Twitter have plunged nearly 20% since the April 26 release of Q1 earnings. Investors have fixated on MAU that grew just 3% year-over-year. International users grew 4% and account for 79% of the 310 million MAUs while the U.S. user base was flat over the period.

The weakness in user numbers may under-represent Twitter’s influence by a huge margin. That’s because as many as 500 million users read their Twitter feeds without signing in or registering. Accounting for these ‘logged-out’ users rockets Twitter’s user base to over 800 million, nearly twice the reported number of members on LinkedIn (NYSE: LNKD).

Twitter has become an indispensable platform for social change, especially around the world where many lack home computers but smartphone penetration is high. During the week before the resignation of Egyptian president Hosni Mubarak in 2011, the rate of tweets in Egypt and around the world about political change surged from 2,300 a day to 230,000 each day. The increase isn’t just local, as people throughout a region and globally are drawn into an extended conversation.

Twitter’s real problem certainly isn’t the user base, but how it will make money off its network.

Monetization And A New Deal Could Double The Share Price

Just as Facebook finally proved its ability to make money in 2012, Twitter could be about to see a jump in revenue. The company signed a $10 million deal with the NFL to broadcast 10 games live this fall. At just $1 million per game, the deal was a steal compared to the $17 million Yahoo (Nasdaq: YHOO) paid to stream one game from London and the $45 million per game CBS and NBC each paid to stream five Thursday night games this year and next.

The fact that Twitter CFO Anthony Noto was the CFO at the NFL until 2010 may have helped, and the NFL has publicly said it did not go with the highest bid in the contest between others including Verizon (NYSE: VZ), Yahoo and Amazon (Nasdaq: AMZN).

Besides the expected growth in user base from the live feeds, the company should see a bump in revenue as well. Twitter will show ads from the networks, but will also control some of its own ad inventory during the games.

Additionally, Twitter’s main monetization programs are still relatively new and investors haven’t given the company much time to refine the model. Ads to the logged-out users just started running in December, and syndicated ads on other websites only started running in February of last year.

Direct response marketing — advertising by companies looking for clicks — has been the fastest growing segment of revenue and should continue to grow on Twitter’s ability to place real-time ads.

The most promising potential may be the company’s access to mountains of real-time data. Twitter already offers licensing and information from its real-time data, but hasn’t yet pushed the product as much as it could. Of the social networks, Twitter is best positioned to offer the data to advertisers and could have a revenue stream that surpasses all other segments.

Shares of Twitter are now valued at a 20% discount to LinkedIn and an 86% discount to Facebook on a per user measure and in-line with LinkedIn on revenue per user. The comparison isn’t apples-to-apples, though, as LinkedIn reports 433 million members but only 103 million active monthly users. Further, if you include the estimated 500 million ‘logged out’ users that see tweets, Twitter’s valuation drops to just $10.20 per user.

Twitter’s revenue is expected to jump 25% this year to $2.77 billion, and could surge even higher on the NFL broadcast deal and monetization of logged-out users. Even if the user base struggles to grow, ad engagements grew by 208% in the first quarter of this year and Twitter’s cost per ad engagement dropped 56% from the same quarter last year.

Giving the company credit for just 650 users between its reported MAUs and logged-out users with a valuation of $30 per user yields an enterprise value of $19.5 billion. That means a share price of about $30.80 or more than double the current price on relatively conservative estimates.

Risks To Consider: Even as costs per engagement fall and the company finds new ways to draw users, investors will be watching for how the company monetizes its user base and the shares could be volatile around earnings reports.

Action To Take: Take advantage of relative valuation in Twitter for a position ahead of this year’s NFL broadcasts and the potential to monetize a much larger user base on and off the platform.

— Joseph Hogue

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Source: Street Authority