Up 19% in the Past Month, Will the Rally in Twitter Stock Continue? The shares of social media giant Twitter (TWTR) have gained 18.6% over the past month on the back of the company's first attempt at building a subscri...

The shares of social media giant Twitter (TWTR) have gained 18.6% over the past month on the back of the company's first attempt at building a subscription business model and a substantial improvement in its advertising revenue. However, given the challenging business environment in a key growth market and the company's weaker-than-expected second quarter outlook, will the stock be able to maintain its rally? Read more to find out.

Shares of social networking giant Twitter, Inc. (TWTR) have soared 18.6% over the past month on the optimism surrounding its recent launch of its first subscription service - Twitter Blue, and on the company's plans to accelerate the pace of its new-product launches. Over the past year, the stock has gained 121.1%, driven by the company's continuing improvement in average monetizable DAU and brand advertising.

TWTR's stock is currently trading 15.7% below its 52-week high of $80.75, which it hit on February 25. And although the company reported strong year-over-year MAP revenue growth in its last reported quarter, its disappointing second-quarter outlook could be a concern.

In fact, a recent tussle over India's IT rules and the country's increasing regulatory scrutiny have made investors nervous about TWTR's prospects. Since India is a key growth market for the company, they fear the challenging environment their could have a negative impact on its shares in the near term.

Here is what we think could influence TWTR's performance in the coming months:

Growing Tensions with the Indian Government

Tensions have been escalating between the U.S. social media giant and the Indian authorities with three new police cases being opened against the company recently. At a time when TWTR is already facing a backlash from the Indian central government for failing to t abide by the country's new IT rules, the recent police cases could make matters worse. If the regulatory scrutiny intensifies in the coming days, it could hurt TWTR's stock price.

Disappointing Second Quarter Outlook

TWTR expects its total revenue to be within the range of $980 million - $1.08 billion. However, the $1.03 billion midpoint of this range falls short of analysts' $1.06 billion expectation. Also, management expects the company's operating loss to be between $170 million - $120 million for the second quarter. While the company's first-quarter revenue totaled $1.04 billion, the weak guidance for the second quarter raises concerns among investors.

Mixed Analyst Estimates

Analysts expect TWTR's revenues to increase 50.7% next quarter (ending September 2021), 28.9% in 2021, and 23% next year. However, the company's EPS is expected to decline 15.8% year-over-year to $0.16 in the next quarter. Its EPS is estimated to rise 190.8% in the current year, and 36.7% in 2022. Furthermore, the Street expects TWTR's EPS to increase at a 40.2% annualized rate over the next five years.

Mixed Financials

TWTR's total revenue increased 28% year-over-year to $1.04 billion in the first quarter, ended March 31, 2021, attributable primarily to 32% year-over-year growth in advertising revenue. Its non-GAAP net income was $68.01 million, compared to an $8.4 million net loss in the first quarter of 2020. Also, TWTR's adjusted EBITDA increased 39.3% year-over-year to $294.11 million. However, its total operating costs and expenses rose 20.7% year-over-year to $983.84 million.

TWTR's 62.9% trailing-12-month gross profit margin is 24.1% higher than the 50.7% industry average. But TWTR's respective 7.5% and 16% levered free cash flow margin and EBITDA margin are 36.6% and 24.6% lower than industry averages. Also, its ROE and ROA are negative 12.8% and 7.1%, respectively.

POWR Ratings Reflect Uncertainty

TWTR has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 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 Quality. The stock's mixed profitability is in sync with this grade.

TWTR has a C Sentiment grade, which is in sync with analysts' expectations regarding its mixed earnings and revenue growth. Also, in terms of Stability Grade, TWTR has a C.

In addition to the grades we've highlighted, one can check out additional TWTR ratings for Momentum, Growth, and Value here. TWTR is ranked #35 of 72 stocks in the F-rated Internet industry.

Click here to view the top-rated stocks in the Internet industry.

Bottom Line

Robust growth in advertising, ongoing product improvements, and substantial growth in its active user base have driven up TWTR's shares. However, an ongoing tussle with the Indian government, coupled with the company's weak second quarter guidance, could cause its shares to dip in the near-term. So, we think investors should wait for the situation to stabilize before investing in the stock.

TWTR shares rose $0.30 (+0.44%) in premarket trading Friday. Year-to-date, TWTR has gained 26.48%, versus a 16.21% rise in the benchmark S&P 500 index during the same period.

Twitter (TWTR) is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

More...