Tesla, Inc.’s (TSLA) CEO Elon Musk has been in the news lately for threatening to cancel his $44 billion Twitter, Inc. (TWTR) buyout offer accusing the social media company of breaching the merger agreement. Musk alleged that the social media company is "actively resisting and thwarting his information rights."
Shares of TWTR declined more than 6% since Musk’s threat made the deal's prospects uncertain and are currently trading much lower than the takeover offer of $54.20 per share, indicating investor apprehensions surrounding the deal.
Although TWTR beat consensus earnings estimates handsomely, it failed to surpass revenue estimates in the last reported quarter. Moreover, analysts expect its EPS for fiscal 2023 to decline 21.7% year-over-year. The stock has declined 13.5% in price year-to-date and 37.6% over the past year to close the last trading session at $37.36. It is currently trading 49% below its 52-week high of $73.34, which it hit on July 23, 2021.
Here’s what could affect the performance of TWTR in the upcoming months if the deal gets canceled:
Robust Financials
TWTR’s revenue increased 15.9% year-over-year to $1.20 billion for the first quarter ended March 31, 2022. The company’s non-GAAP net income increased 435% year-over-year to $755.57 million. Also, its non-GAAP EPS came in at $0.90, representing an increase of 462.5% year-over-year. In addition, its adjusted EBITDA increased 301.2% year-over-year to $1.18 billion.
Mixed Analyst Estimates
Analysts expect TWTR’s EPS for fiscal 2023 to decline 21.7% year-over-year to $1.30. Its revenues for fiscal 2022 and 2023 are expected to increase 15.9% and 21.5% year-over-year to $5.88 billion and $7.15 billion, respectively.
Stretched Valuation
In terms of forward non-GAAP P/E, TWTR’s 32.89x is 99.4% higher than the 16.49x industry average. Likewise, its 4.95x forward EV/S is 152.5% higher than the 1.96x industry average. And the stock’s 5.22x forward P/B is 187.7% higher than the 1.81x industry average.
Lower-than-industry Profitability
TWTR’s 4.27% trailing-12-month net income margin is 7.9% lower than the 4.64% industry average. Likewise, its 1.77% trailing-12-month EBIT margin is 80% lower than the 8.89% industry average. Furthermore, the stock’s 0.37% trailing-12-month asset turnover ratio is 20.7% lower than the industry average of 0.46%.
POWR Ratings Reflect Uncertainty
TWTR has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. TWTR has a C grade for Sentiment, consistent with its mixed analyst estimates.
The stock is currently trading below its 50-day and 200-day moving averages of $43.43 and $46.12, respectively, indicating a downtrend, in sync with its D grade for Momentum.
TWTR is ranked #24 out of 66 stocks in the Internet industry. Click here to access TWTR’s ratings for Growth, Value, Stability, and Quality.
Bottom Line
Irrespective of Elon Musk’s decision to buy TWTR, it may not be wise to buy the stock now as analysts expect its EPS to decline in fiscal 2023. Moreover, the stock is currently trading at a stretched valuation. Also, if Musk’s claim that TWTR is misleading investors about the number of fake accounts and bots present on its platform is higher than initially projected turns out to be accurate, it may affect the stock’s performance. So, it could be wise to wait for a better entry point in the stock.
How Does Twitter (TWTR) Stack Up Against its Peers?
While TWTR has an overall POWR Rating of C, you might want to consider investing in the following Internet stocks with an A (Strong Buy) or B (Buy) rating: Yelp Inc. (YELP), trivago N.V. (TRVG), and Travelzoo (TZOO).
TWTR shares were trading at $37.23 per share on Friday morning, down $0.13 (-0.35%). Year-to-date, TWTR has declined -13.86%, versus a -22.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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