Nomura Securities Upgrades Twitter, Inc. (TWTR); 5 Reasons to Buy

Nomura Securities upgraded Twitter, Inc. (NYSE: TWTR) from Neutral to Buy with a price target of $43 saying the stock price is now implying slower user growth. However, they are raising estimates on revenue per user, incremental margins.

Anthony DiClemente said, "We believe that the market has now priced in the expectation that Twitter remains a niche social media product. We believe risk / reward is much more favorable now, given the possibility that product enhancements rejuvenate user growth; we think ARPU will beat estimates given strength in ad demand, and we believe that incremental margins should be higher than the Street expects. Our target price is based on a P/E of 24x our 2017E EPS, discounted two years."

DiClemente lists five reasons for the upgrade:

1) The stock is assuming Twitter as a niche product only. With Twitter down over 50% YTD and ~28% since 1Q results, we believe the market has priced in the notion that Twitter is unlikely to achieve mainstream status. The Street expects Twitter to be less than 20% of the size of Facebook in three years, but if there is any traction for recent product initiatives to boost user growth, there may be upside to Street estimates.

2) Velocity of monetization per user growth fastest in sector, by far. Our checks indicate that ad budgets continue to steadily shift to Twitter, driving robust velocity in monetization per user. Our model implies that Twitter can reach the ARPU that Facebook posted in 2013, driving an incremental $130mn in 2015E advertising revenue. Also, we believe there is upside from “off-platform” monetization via Twitter’s MoPub exchange; one example is the $230mn Omnicom-MoPub deal announced yesterday.

3) International is just scratching the surface. International usage on Twitter approaches 80% of the total, but accounted for only 28% of revenues in 1Q. We raise our 2015E international ARPU estimate to $3.01 from $2.81, but believe there is material upside here as this is only 20% of domestic ARPU.

4) Incremental margins will be higher than Street is modeling. Given Twitter’s relatively fixed operating cost structure, Twitter should benefit from the high levels of incremental operating margins that Facebook possesses; yet the Street is modeling Facebook’s incremental margins in the mid-60s over the next few years, versus Twitter in the high 30s. We are now modeling 70% incremental margins for Twitter over the next 3 years.

5) Raising estimates to above the Street. We are raising our revenue estimates on better monetization and adjusted EBITDA on higher incremental margins. Our target price of $43 remains unchanged, implying ~40% upside; our target price reasonably implies a 24x P/E when discounting back our 2017E EPS estimate of $2.19 by two years.

For an analyst ratings summary and ratings history on Twitter, Inc. click here. For more ratings news on Twitter, Inc. click here.

Shares of Twitter, Inc. closed at $30.51 yesterday.

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