Book Profits In Twitter Stock Ahead Of Q2 Earnings

The question isn’t whether Twitter Inc (NASDAQ:TWTR) earnings will miss or beat estimates, but if Twitter can really turn things around.

Shares of San Francrisco, California-based Twitter Inc (NYSE:TWTR) have had a great run since the company reported its Q1 earnings on the 26th of April. The stock is now up by close to 23% Year To Date (YTD), and 36% over the preceding 3 months alone. The rally that commenced after Twitter reported better than expected growth in Monthly Active Users (MAUs) has given investors something to cheer about after a rather long lull. To help matters, multiple positives have emerged for the micro-blogging platform over the last few months. However, a real turnaround is likely to take much more time to play out, assuming it does. And with Twitter due to report its Q2 earnings on the 27th of this month, investors might want to take some profits, at the very least.

What The Street Expects From Twitter’s Q2 Earnings Release.

Twitter is expected to report its results for Q2 2017 on the 27th of July before the bell. The social media company is due to report its numbers at approximately 4:00 a.m. Pacific Time (7:00 a.m. Eastern Time), followed by a conference call at 5:00 a.m. Pacific Time (8:00 a.m. Eastern Time). Analysts expect the company to report a near 11% Year-on-Year (YoY) drop in revenue for the quarter, with revenue expected to come in at $536.67 million. On the earnings front, analysts expect Twitter to report a non-GAAP Earnings Per Share (EPS) of 5 cents, compared to last year’s Q2 EPS of 13 cents, marking a 61% decline in earnings.

What These Estimates Tell You About The State Of Twitter.

The point worth noting here is that analysts aren’t expecting the much-celebrated acceleration in user growth to aid top line growth all that much. And that probably has a lot to do with the trends we’ve seen in Twitter’s ad prices. Ad prices or ‘cost per engagement’ as the company calls them in their earnings documents have been falling sharply for a while now, recording YoY drops of 64%, 44%, 60% and 63% over the last 4 quarters. This has effectively negated the growth in users, as well as ad-engagement, with the latter recording growth rates of between 91% and 226% during the same time frame.

Given this data, it seems as if the absolute drop in ad prices would look even worse, though we don’t have sequential data to confirm it. Yet, the drops in YoY revenue growth rates also point in the same direction, having fallen from 36% in Q1 2016, to -8% in Q1 this year. Ad prices are likely to continue declining, with no real positive trigger in sight. While some believe that advertisers’ search for platforms beyond Google and Facebook could aid Twitter, it’s worth noting that candidates like Amazon are also entering the fray, staking a claim for a share of digital ad-spends.

The other argument put forth by the bulls is that user growth will bring advertisers back. It’s a possibility and nobody can deny it, but it seems unlikely if you look at the broader context. On one hand we have Instagram, which is adding about 100 million users every few months, and on the other, we have Twitter, which is seeing investors celebrate the addition of 9 million users, owing to a significantly worse show in the past. As an advertiser, on which of the two platforms would your money be spent? The answer is simple. Twitter’s Daily Active User (DAU) numbers have shown YoY improvements as well. However, since Twitter has been reluctant to divulge the absolute numbers, it’s hard to draw any conclusions till we lap the whole of 2016, to see if the growth sustains over the coming quarters. Since we don’t know how DAUs have moved sequentially, we don’t know if the improvements are just over last year’s numbers. YoY numbers only become important if we know for certain that DAUs have been improving every quarter sequentially.

Clearly, unless we see a huge improvement in user growth, this recent rally isn’t going to last beyond a quarter or two. If ad prices don’t pick up, there’s no way Twitter can simply keep increasing ad engagement or ad load on the platform. As is evident from these numbers, whether Twitter beats or misses estimates is more or less immaterial. There’s a clear pattern here, and unless that changes, there’s not much point getting gung-ho here. Twitter has indeed bagged a number of live streaming deals this year, but then, this was the scenario last year as well, with the micro-blogging platform arguably leading the live streaming race. Twitter has promise, but it’ll have to prove this in hard numbers. Until then, conservative investors would be better off taking some profits off the table. Looking for stocks that are backed by better fundamentals? Check out our top stock picks, which have beaten the NASDAQ by over 156%. If you’re looking for technical trading ideas, you should also check out our daily trading ideas section.