Twitter | Fundamental Analysis| MUST READ...

Shares of Twitter dropped 11% last Wednesday after the management released a mixed Q3 earnings report. Revenue grew 37% year-over-year to $1.28 billion, which was in line with analysts` forecasts. But the company also posted a net loss of $537 million, or $0.67 per share, $0.85 below expectations, and down sharply from a net income of $29 million, or $0.04 per share, last year.

That loss was due to a one-time $766 million in legal expenses to settle a class-action lawsuit that was filed five years ago. Shareholders blamed Twitter for using misleading engagement metrics.

In the fourth quarter, Twitter anticipates revenue growth of 16%-24%, which is in line with expectations for growth of 22%. But that forecast still includes revenue from MoPub, the mobile advertising network that the company intends to sell to AppLovin in the first quarter of 2022. The company expects its operating income to be positive again next quarter, but still down 29% to 48% year-over-year as the company ramps up its investments.

Twitter's performance has not been good, and it's obvious why investors have rushed away. But isn't this drop creating a buying opportunity?

Twitter's number of monetizable daily active users (mDAUs) rose 13% year-over-year (and 2% sequentially) to 211 million for the quarter. This is a continuation of the steady growth in mDAUs over the past year.

In the third quarter, Twitter's international mDAUs grew 14% year-over-year to 174 million, but mDAUs in the U.S. grew only 3% to 37 million. Nevertheless, 58% of Twitter's revenue still comes from U.S. users. The international increase was boosted by Japan, which accounted for 29% of the company's international revenue and 12% of its total revenue.

Like Facebook, Pinterest and Snap, Twitter is doing its best to steadily improve the monetization of overseas users to reduce its overall dependence on the U.S. market.

Twitter's advertising revenue, which accounts for 89% of total sales, grew 41% year-over-year as the company benefited from the Olympics, increased its ad connections by 6%, and felt only a "moderate" influence of Apple's privacy update on iOS data tracking apps. The cost per engagement (CPE) that advertisers pay for each ad engagement was also up 33% from the initial impact of the pandemic a year earlier.

Twitter's core advertising business looks quite viable, but the company expects the sale of MoPub to result in a $200 million to $250 million drop in total revenue in 2022. The company doesn't expect to make up for those losses by growing other businesses next year, but it also said the sale won't alter its purpose of making more than $7.5 billion in annual revenue by 2023 -- a big jump from Wall Street's expectation of $5.1 billion this year.

Twitter believes it will be able to reach that purpose by increasing its audience to more than 315 million mDAUs and launching new products. But many of the products Twitter has launched - including short-lived "Fleets," organized "topics" for tweets, a new "tip" feature, and subscriptions for top accounts - do not inspire much confidence in the company's ability to meet its goals.

Twitter has already grown its workforce by more than 30 percent in 2021 to support these ambitious plans. As per CFO Ned Segal, these expenses, as well as other recent investments, are not yet fully accounted for and will likely result in "an average 20% increase in total expenses next year before new hires or additional investments during 2022."

So, some investors are probably concerned that Twitter will spend too much money next year while not launching any inspiring revenue-boosting products. They are also probably skeptical of Twitter's rosy projections for 2023, especially as mDAU growth - especially in the U.S. - is gradually slowing.

Twitter's stock is trading at about 40 times the earnings forecast. This price-to-earnings ratio makes it more expensive than Facebook, which trades at 20 times earnings forecast, but it is cheaper than Pinterest or Snap.

Twitter is still developing, but its valuation was probably inflated because of the ambitious goals it set at its Investor Day in February. Snap was also recently punished for a mixed quarter after announcing that it could deliver more than 50 percent revenue growth in the next few years.

Twitter could suffer a similar fate over the next few quarters if its aggressive spending plans don't bear fruit. Therefore, it would be prudent not to touch Twitter stock until the company shows clearer signs that it can achieve its ambitious long-term goals.