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Twitter: An Early Look at Earnings Estimates


Analysts are expecting big growth out of Twitter.

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.


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.
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