Introduction to my TWTR Analysis

Due to the potential buyout of TWTR by Elon Musk, I think it is important to see how much value is actually behind Twitter to inform decision making for the TWTR holders over the next couple of weeks.

TWTR is undervalued and a solid investment. I'm going to jump into why I believe this to be the case. We are going to look at TWTR's current valuation, recent earnings, and 6 key financial ratios. This is a fairly long analysis but if you're thinking of investing in TWTR then you should have a decent understanding of why you decided to make this investment. Anyway, enough with the intro, let's jump into the analysis.

TWTR Summary

If you're not familiar with TWTR then here is a quick summary, feel free to jump past this part.

“Twitter, Inc. operates as a platform for public self-expression and conversation in real-time. The company offers Twitter, a platform that allows users to consume, create, distribute, and discover content. It also provides promoted products and services, such as promoted ads and Twitter amplify, follower ads, and Twitter takeover; Tips to directly send small one-time payments on Twitter using various payment methods, including bitcoin; Super Follows, a paid monthly subscription, which includes bonus content, exclusive previews, and perks as a way to support and connect with creators on Twitter; and Ticketed Spaces to support creators on Twitter for their time and effort in hosting, speaking, and moderating the public conversation on Twitter Spaces. In addition, the company offers Twitter Audience platform, an advertising offering that enables advertisers to extend advertising campaigns; Twitter Developer Platform, a platform that enables developers to build tools for people and businesses using its public application programming interface; and paid access to Twitter data for partners with commercial use cases. Twitter, Inc. was founded in 2006 and is based in San Francisco, California.”

TWTR Stock Recent Volume Comparison

I'm usually more of a fundamental investor but I also think there are some technical indicators that help provide additional; content when making an investment, which is why we will look at recent volume.

Comparing TWTR's most recent volume to their average monthly volume can help us derive some valuable insights. Firstly, TWTR's trading volume over the past day is sitting around 76.5M, which is significantly higher than their average monthly trading volume of 44.13M. This can be obviously inked to the fact that Mush has bid to buyout TWTR in full for a premium over the current market price.

This higher recent volume is indicative of traders actively betting on price increases in the TWTR stock and increased enthusiasm around the TWTR stock. If this high relative volume is paired with a break of resistance the upwards price movement is typically more significant.

TWTR Valuation and Stock Rating

Understanding the valuation of a stock is a useful check to see if the investment fundamentals are sound. I pulled the valuation and stock rating for a quick view to see if TWTR is considered undervalued or overvalued.

Analysts of TWTR have given an overall rating of 5, on a rating scale between 1 and 5, with 1 being the worst and 5 being the best. This overall rating consists of 3 different ratings, PE, ROE and DCF which I'll get into below.

PE Rating: Currently, analysts have given TWTR a PE rating of 5. This is the highest ranking and implies that the TWTR stock is currently undervalued. The PE rating factors in the trailing, current, and future PE Ratio of the TWTR stock. In the case of TWTR, analysts think that TWTR is undervalued given their P/E ratios, relative to the average P/E ratio of their peers.

ROE Rating: Currently, TWTR has been given an ROE rating of 3 by analysts. This is a very average score, which indicates that TWTR's ROE is in line with the ROE of their peers. TWTR's ROE score of 3 implies that they are generating small profits if any, and there is some room for improvement.

DCF Rating: We have saved the best (and most influential) rating for last. TWTR has been given a score of 5 based on the quality of their DCF model (and projections). The DCF model is very commonly used by investors to value securities and is the de facto measurement of a stocks value. As a result of this, a high level of importance is placed on the company's DCF models. With that being said, TWTR's score of 5 is very good, implying the outlook for TWTR is very positive, and their stock is currently undervalued.

Based on these metrics we can see that TWTR seems to be undervalued and a solid investment. Considering these core metrics look good, I would be likely to take a position in TWTR. That being said, I want to look at some other metrics and factors.

TWTR Stock Key Ratio Analysis

There are 6 main financial ratios that we are going to look at today. These ratios can help us to get a general idea of the financial health of the TWTR stock before we choose to enter into (or add to) a position. These ratios can help us to understand the current state of Twitter, Inc.'s business, as well as what their future might look like.

EPS: EPS is one of (if not) the most commonly used in finance. TWTR's EPS is currently -0.28, which means that for every outstanding share of TWTR they make $-0.28 in net income (after tax). EPS figures can be manipulated by the company, as there are accounting practices that can be used to hide unfavourable expenses/figures, so don't look at this figure as the “be all end all”
ROE: A company's ROE is the return a company can receive by projects/investments funded by their shareholder's equity (how well they can turn money into more money). A high ROE is typically favourable, unless it is unusually high, then you may have to do some further investigation. ROE's over 15% are considered to be good, and TWTR's ROE is currently at -2%. Any ROE that is in the negatives is generally not a good sign.
Debt-to-Equity: A company's Debt-to-Equity ratio shows us how much debt a company is carrying relative to the amount of shareholder's equity they have. By taking a quick look at this figure we can determine if a company's debt levels are potentially risky and need further investigation into. If a company's D/E ratio is above 2.5, we may want to analyze their debt to determine if they will be able to pay it all back (avoiding defaults). TWTR's current D/E ratio is 1.03, which is very healthy.
Interest Coverage Ratio: This figure is often used in conjunction with the D/E ratio in order to determine if a company can handle their current level of debt. This metric shows us how well a company's earnings can be used to cover their debt obligations. A high Interest Coverage Ratio indicates that a company should have no problem paying off their debts, and a low coverage ratio may indicate future debt/insolvency problems. TWTR currently has an interest coverage ratio of 4.44, which means that their earnings cover their interest payments 4.44 times over. This indicates that TWTR should have no problem meeting their debt obligations and has a very low chance of defaulting.
EV/EBIT: The EV/EBIT ratio is like the P/E ratio in the sense that they are measures of the value that you are receiving for purchasing a stock at its current market price. Using the EV/EBIT ratio (rather than the P/E ratio) is beneficial as it factors in the company's debt. A lower EV/EBIT ratio indicates that the stock is close to its fair value, and potentially has more intrinsic value than other stocks. Currently, TWTR has an EV/EBIT ratio of 133.98, meaning that it will take 133.98 years in order for TWTR to generate enough income to reach their current enterprise value. This is high and somewhat inconsistent, so this metric should be negated for the foreseeable future.
Operating Margin: A company's operating margin measures the profitability of the company's operations. This metric is most important when using it to compare to peers of a company. This is due to the fact that different industries have different level of profitability. However, if your company's operations are more profitable than your peers, you have an advantage and are a more attractive option. Currently, TWTR's operating margin is 7%, in comparison to the Internet Content & Information industry's average operating margin of 9.75%, which is alright

Why I Think TWTR is Undervalued/Overvalued

Overall, I think that the TWTR stock is undervalued. This is due to TWTR overall stock grade being ranked a 5, track record of beating earnings, and the fact that 3/6 key ratios are good (if not great). I think that all of these factors on their own are amazing, however when you look at them together and factor in the fact that their relative volume is higher than their average volume, it creates the perfect storm.

Thanks for taking the time to read my analysis, please follow me for the latest investment insights and leave a comment if you have any questions or disagree with my thoughts - always open to a good discussion!