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Twitter: An Early Look at Earnings Estimates

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Analysts are expecting big growth out of Twitter.

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Twitter technically had an operating loss of $63.4 million last quarter. Back out stock-based compensation of $43.6 million, and you can cut that loss down by 69%. See how this goes?

Looking ahead, you can exclude those types of charges, and mix in ongoing revenue growth and a modest slowdown in operating spending, and voilà -- you have earnings!

Again, is this "correct"? Maybe not, but this is just the way the world works.

But What About That Measily $0.18 EPS Estimate for 2015?

Consider that number highly variable. There's potential for it to go up significantly.

Twitter's primary comparable peers, Facebook (NASDAQ:FB) (61% EBITDA margin) and the aforementioned LinkedIn are tremendously profitable. In all likelihood, Twitter will be too. With its huge revenue growth, margins will inevitably rise.

The company is spending tremendous amounts of money on R&D (47% of revenues year-to-date), as well as sales and marketing (33% of revenues). This certainly won't be the case as the company hits $1 billion in revenues and beyond.

The Power of Excel

The bottom line is, anyone with basic spreadsheet skills can jerry-rig a huge earnings number for Twitter when looking a couple years out. You back out those non-cash items, pump up margin forecasts, and boom! Earnings materialize.

That preliminary 2015 EPS consensus of $0.18 could easily turn into $0.25 or $0.50, which of course flows into something like $3 or $5 or $7 per share years down the road -- the only limit is your imagination!

If Only It Were That Simple...

Years ago, I gave an wise old man an incredibly detailed bull case on a stock.

In response, he gave me a stern look and simply asked "How's the quarter?"

That's what matters here.

With high-octane momentum stocks, the market takes what happens today and extrapolates it until the end of time.

So it will be key for Twitter to deliver a dynamite fourth-quarter earnings report, something we should receive in January. Even though investors are incredibly pumped for this IPO, don't be lulled into a false sense of complacency. Twitter really does have to hit the numbers.

Why?

Because that could have investors pulling forward (meaning that $0.18 number goes up big time) or pushing back expectations for Twitter's profitability, and that will have a huge impact on the stock.

The actual future numbers don't matter; what's important for the bulls is that expectations keep rising. That's the mission.

Twitter: @Minyanville

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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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