Is Twitter Stock a Buy After a Strong Q4?

Following a brutal second quarter of 2020, when Twitter (NYSE:TWTR) reported a 19% year-over-year decrease in revenue, the social network bounced back in Q3. Revenue during the period increased 14% year over year, signaling that advertisers were reopening their wallets as the economy started to recover from a coronavirus-driven economic downturn earlier in the year. 

The big question, however, was how sustainable this momentum was. At the time of Twitter’s third-quarter earnings report, there was still significant uncertainty about COVID-19, the political environment during an election year, and the overall economy. This uncertainty is one reason Twitter didn’t provide revenue guidance for its fourth quarter.

As it turns out, however, Q3 was the beginning of what would prove to be an acceleration in digital advertising — a holiday-quarter trend investors have observed at other ad-supported tech companies, including Pinterest and Alphabet.

A businessperson looking at his smartphone while driving in the back of a taxi cab.

Image source: Getty Images.

Here’s a look at Twitter’s strong fourth-quarter results — and why they may be providing investors a buy signal.

Accelerating growth

After market close on Tuesday, Twitter reported impressive fourth-quarter performance. A 27% year-over-year increase in monetizable daily active users powered a 28% year-over-year surge in total revenue during the period to $1.29 billion. That’s double the growth rate Twitter achieved in Q3. The company’s advertising revenue, which accounts for the bulk of its total sales, grew 31% year over year. This compares to 15% growth in Q3.

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“This was mostly driven by strong brand advertiser demand in the U.S. for most of the quarter,” Twitter explained in its fourth-quarter shareholder letter. “We saw a dip in U.S. advertiser spend during a short period bracketing the U.S. presidential election on Nov. 3, followed by a strong resumption in demand that continued through the holidays.”

Data licensing revenue, which accounts for about 10% of total revenue, also accelerated during Q4. The segment’s sales grew 9% year over year to $134 million. This compares to 5% growth in the prior quarter.

Twitter’s bottom line is benefiting from its scalable business model. The company’s operating income rose 65%, from $153 million in the year-ago quarter to $252 million. This outsize increase relative to the social network’s top-line growth over the same period came from an expanding operating margin. Twitter’s operating margin increased from 15% in the year-ago period to 20%.

Growth without Trump

All of these numbers make Twitter stock look like a solid bet for the long haul. But what really shows the resilience of Twitter’s business is that the company has continued to see strong growth in monetizable daily active users despite banning former President Donald Trump. These users increased at a rate “above the historical average from the last four years,” management explained in its fourth-quarter shareholder letter. Further, Twitter provided aggressive guidance for this key user engagement metric for the full quarter of 2021, forecasting that monetizable daily active users would rise 20% year over year for the period. This rate would be on top of 24% growth in the year-ago quarter.

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Considering Twitter’s strong financial performance, its healthy engagement even without Trump on its platform, and the overall growing appeal of Twitter’s platform as a global social network (the company now has 192 million monetizable daily active users), this looks like a good growth stock for investors willing to hold shares for the long haul.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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