Buy the Bloodshed in Twitter Stock After the Q4 Earnings Release

Twitter is surprisingly relevant among the key demographics with money

With social media firm Twitter (NYSE:TWTR) incurring a wild ride in recent months, prospective buyers are right to wonder if its shares will stabilize soon. Adding to the pressured decision, the company releases its fourth quarter of 2019 earnings report on Feb. 6. Can investors trust this name or is Twitter stock still at risk for further volatility?

Based on events over the past few months, it’s hard not to have at least some skepticism. In its last earnings report for Q3, Twitter uncharacteristically dropped a stinker, missing on both the top and bottom lines.

Making matters worse, the misses were steep in magnitude. Against an earnings-per-share target of 20 cents, Twitter delivered only 17 cents. Analysts had previously pegged revenue at $874 million, but the social media firm only mustered $823.7 million. Not surprisingly, Twitter stock tumbled, dropping nearly 21% on the disclosure.

Moreover, stakeholders may be in for a nasty surprise when Q4 rolls around. First, management warned that significant headwinds — including product issues and lower-than-expected advertising revenue — could “bleed over” into 2020. Critically, some of the issues at Twitter involved ad interface problems that stymied the impacted business.

Second, grumblings in the options market may represent a harbinger for Twitter stock. According to the various dynamics involved in this derivative market, the trading action implies a sizable drop for TWTR.

Technically, the posture of Twitter stock is also worrisome. After starting off the year on the right note, shares have encountered upside resistance. Additionally, long-term support lies around the $17 to $18 range. If management doesn’t deliver the goods — and they haven’t suggested much confidence — we could see serious pain.

Greener Side for Twitter Stock

At the same time, not everything about the last Q3 earnings report implied doom and gloom. Primarily, the number of monetizable daily active users (mDAU) offers food for thought in the long run. That’s especially the case if Twitter stock tumbles following Q4.

In the U.S. market, the company reported 30 million mDAUs, up over 15% from 27 million in the year-ago quarter. This is a significant metric because, while eyeballs for social media firms matter, ultimately for stakeholders, it’s about conversion opportunities. After some flatlining in mDAUs in 2017 and most of 2018, this statistic is trending very positively.

As well, another impressive point is international mDAUs. In Q3 2019, global mDAUs hit 115 million, up over 17% from Q3 2018’s tally of 98 million. With a higher monetization rate among international users, this suggests two things: one, other cultures find Twitter’s platform appealing and two, they’re likewise willing to open their wallets.

What’s notable here is that social media king Facebook (NASDAQ:FB) features strong international engagement. As I mentioned in an earlier InvestorPlace article, the U.S. doesn’t rank as the top among leading Facebook users. That title belongs to India. National pride aside, this is a positive dynamic for Facebook because it provides a pathway for growth beyond America’s borders.

Similarly, this concept applies to Twitter, which logically benefits TWTR stock.

Finally, another bullish catalyst for President Trump’s favorite communications platform is demographic distribution. Twitter features the highest usage among those ages 25 to 34 and 55 to 64. Of course, the significance here is the ad-revenue growth potential. These two demos essentially capture the bulk of an individual’s lifetime earnings power.

To have strong engagement here, as opposed to the lower-income potential tweens’ category, augurs well for Twitter.

Nearer-term Picture is Risky

Despite the credible pathway toward longer-term revenue, the immediate picture is shaky for Twitter stock. Mainly, I say this because the broader appetite for social media-based investments may have taken a hit.

Just recently, Facebook released its results for Q4 2019. Although the sector giant beat its consensus EPS estimate, Wall Street was disappointed because of its maturing growth and unexpectedly high costs. Further, management warned that the growth rate may slow in Q1, citing the “impact of global privacy regulation and concerns about ad targeting.”

This latter warning is especially relevant to Twitter given its own recent troubles in that department. Plus, with the options market anticipating another disappointing earnings report, the smart approach is to wait until after the Q4 print. With Facebook dropping sharply in afterhours trading following its earnings disclosure, this just adds to the cautionary take.

But if that discount occurs, I might take another look at Twitter stock. The underlying platform has proven relevant to the demographic that matters — those who have money to spend. Combine that with strong international appeal and Twitter may soon become a viable contrarian play.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.