Chief Investment Strategist
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.
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.
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.
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)