Twitter: An Early Look at Earnings Estimates
Analysts are expecting big growth out of Twitter.
Twitter (NYSE:TWTR) will come public on the New York Stock Exchange (NYSE:NYX) this Thursday, and with the Wall Street punch bowl justifiably spiked, it's time to dig into how financial expectations are shaping up for the social media giant.
The big Wall Street firms like Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) that underwrite major IPOs typically wait 40 days to launch coverage on their new names.
But we fired up our Bloomberg terminal this morning and found that five research firms are reporting Twitter estimates, giving us an early sneak peak at forward estimates for the company.
First, we'll take a look at the fourth quarter of this year, results for which will likely be reported in January. All eyes will be fixated on the revenue number, so that's a logical place to start.
Analysts are currently expecting $218 million in revenue, which assumes 94% year-over-year growth, a slowdown from the 105% achieved in the past two quarters:
On a sequential basis, this assumes 30% growth, which is down from the 36% growth between the third and fourth quarters of 2012.
In terms of annual growth, analysts again expect Twitter's rate of expansion to level off a bit, going from 102% in 2013 to 78% in 2014, and 54% in 2015:
Analysts expect a significant spike in EBITDA over the next few years, hitting $395 million in 2015:
Expectations for Twitter's bottom-line profitability remain quite low, with annual losses projected through 2014 before a profit of $0.18 per share in 2015:
So Why Is Everyone So Pumped for Twitter if It's Making So Little Money?
It's tempting to point at Twitter's current losses and assume they're a big deal.
But remember that a good deal of Twitter's expenses are non-cash outlays like stock-based compensation, which investors will be happy to exclude when valuing the stock.
While accounting enthusiasts knock the concept of non-GAAP financial metrics, in the real world of momentum trading, they're not just generally accepted, they're universally embraced. If a company's revenue numbers are strong enough, they can get away with quite a bit.
I call this the "Universal Denial of Generally Accepted Accounting Principles."
It may not be "correct," but it's just the way life is. In fact, I would assume the above EBITDA and earnings estimates are non-GAAP, meaning they'd look much worse if they were fully GAAP-compliant.
Let's take LinkedIn (NYSE:LNKD) as an example of how this kind of stuff plays out.
Here's a little table posted at the end of its last earnings report:
What do people care more about? The official GAAP EBITDA figure of $38 million (adding depreciation and amortization back to operating income), or the adjusted $92.8 million number that got LinkedIn to that aforementioned 24% margin?
Given that the stock is up 97% year-to-date, and 357% since its IPO, I'd say that investors are more than okay wth these types of adjustments.
If you need other examples, take a look at Salesforce.com (NYSE:CRM), Splunk (NASDAQ:SPLK), and Zillow (NYSE:Z). These stocks would not be where they are if investors didn't embrace non-GAAP metrics.
And just like with these companies, Twitter will be forgiven for backing out expenses like stock-based compensation, allowing non-GAAP earnings to swell.
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