Twitter Twitter Twitter

Twitter steps out of Dorsey’s shadow

Equities 6 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Twitter's founder Jack Dorsey is stepping down as CEO leaving the reign to CTO Parag Agrawal. This is hopefully the beginning of a new trajectory for Twitter that has underperformed relative to its potential for way too long. The company has two main objectives. Lift revenue growth to around 30% which would put Twitter well above Facebook and Alphabet in terms of growth, and then drastically improve the operating margin to around 35% which would be almost double of the current level.


Is this Twitter’s Nadella moment?

Another technology founder in Silicon Valley is leaving the stage, Mark Zuckerberg of Meta is one of the few left, with Jack Dorsey stepping down as CEO after presumed a lot of pressure from shareholders such as the activist hedge fund Elliott Management. His successor is the CTO Parag Agrawal and Dorsey will stay on the board for 2022. The main question is whether this is Twitter’s Nadella moment (Nadella is the current CEO of Microsoft and took over in 2014) meaning whether the new CEO with less strings attached and not being a founder can drastically change the growth and product profile of the company.

Too much fat

Our main issue with Twitter has always been the lack of consistency in operating margins. Given how consistent Google and Facebook are running their business it has always been a mystery why Twitter has not been more consistent in its operating performance. The company’s operating margin has come down for three straight quarters despite a healthy backdrop for online advertising spending in terms of demand and pricing. Free cash flow generation has been very disappointing over the past year and ultimately that has been driving the share price lower. Twitter has to fundamentally improve the EBITDA margin from its current 18.5% to somewhere closer to 35%; it will be a stretch to demand Facebook-like margin of 50%. If Twitter’s new CEO can deliver that then shareholders are in for some great returns. But more importantly there are no excuses for not delivering high revenue growth while improving the operating margin when you are generating $5bn in annual revenue. Facebook and many other technology companies have been able to grow revenue and operating margin at the same time. Twitter must do the same.

Source: Bloomberg

So there are two operating yardsticks for shareholders: revenue growth and operating margin. The latter should easily be done by either reducing headcount or at least stop hiring more people at the same pace as before. On revenue growth the key yardstick is to grow faster than the duopoly (Meta and Alphabet) which is expected to grow revenue around 20-25%. Twitter needs to take market share and get closer to Snap revenue growth in order not to lose the narrative and sentiment from investors. In our book, Twitter should be able to grow 30-35% on improved engagement, product features, more brand spending from large brands etc. and with analysts currently estimating 21% revenue growth in 2022, there is a heavy and urgent task ahead for the new CEO.

Source: Bloomberg

Twitter is an acquisition target

With Dorsey gone as CEO and eventually leaving the board by late 2022, it clears the way for an acquisition of the company should the right buyer with the right price come by. Twitter could be an interesting bolt-on acquisition for a traditional media company that wants to enter the social media industry. Investors were initially trading the shares higher on the news of Dorsey stepping down, but the shares ended lower for the session now down 43% from the peak in late February. Given the expectations from earlier this year it is clear that the company has not performed as expected and the new CEO Agrawal will have to quickly earn the trust of investors. For Twitter we really hope this is the company’s Nadella moment. Analysts remain positive on the stock with a 12-month price target of $68 which 49% above yesterday’s close.

Source: Saxo Group
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.