Up until recently, Twitter Inc. ( NYSE: TWTR ) stock had gained significant traction following its initiatives to breathe new life into its business. These initiatives included the launch of new products and features such as “Spaces”, which would compete with audio-only rival Clubhouse, and “Super Follows”, a subscription service that would enable content creators to receive payments. The company also entered an acquisition spree in early 2020 with some of its notable acquisitions including Squad, a screen-sharing app, and Revue, a newsletter publishing platform. With expectations that these innovations would better position the business against its major competitors, investor optimism was raised and share prices rose over late 2020.

However, the newly found momentum lost steam after the company reported its Q1 2O21 earnings. Shareholders saw their investment drop 18% to $53.56 in the week since the company reported its first-quarter result on April 29. Revenues of $1.04 billion were in line with analyst expectations and represented a 28% increase year-over-year. Meanwhile, the company surprised on the earnings front, posting a statutory profit of $0.08 per share against an expected loss of $0.02 per share.

By no means a disappointing quarter, Twitter's performance was a tough sell against the massive beats reported by other tech companies such as Facebook ( NASDAQ: FB ) and Alphabet ( NASDAQ: GOOGL ) , which posted revenue surprises of 10% and 7% respectively in Q1 2021. Additionally, subdued Q2 2021 revenue guidance provided by Twitter management might also have played a role in the market’s reaction. The company provided a guidance range between $980 million and $1.08 billion versus consensus analyst estimates of $1.06 billion.

View our latest analysis for Twitter

NYSE: TWTR Earnings and Revenue Growth May 5th, 2021 (figures are LTM)

Altered Analyst Expectations for 2021

Following the latest results, there's definitely been a decline in analysts’ sentiment with the 2021 EPS now forecast to come in at $0.18 per share instead of the much higher $0.24 forecast earlier. There’s also a slight dip in revenue expectations from the earlier estimate of $4.81b to the current consensus of $4.79b in 2021. However, even with the slight decline in forecast, the company is expected to see a 21% increase in its sales over the next 12 months.

In addition, the average price target fell 8.9% to $66.03, with reduced earnings forecasts clearly tied to a lower valuation estimate. The consensus price target is just an average of individual analyst targets, so it could be handy to see how wide the range of underlying estimates is. The most optimistic Twitter analyst has a price target of $95.00 per share, while the most pessimistic values it at $30.00. This is a fairly broad spread of estimates, suggesting that analysts are forecasting a wide range of possible outcomes for the business.

These estimates are interesting, but it can be useful to paint some more broad strokes when seeing how forecasts compare, both to Twitter's past performance and to peers in the same industry. It's clear from the latest estimates that Twitter's rate of growth is expected to accelerate meaningfully, with the forecast 29% annualised revenue growth to the end of 2021 noticeably faster than its historical growth of 10% p.a. over the past five years. Compare this with other companies in the same industry, which are forecast to grow their revenue 15% annually. Factoring in the forecast acceleration in revenue, it's pretty clear that Twitter is expected to grow much faster than its industry.

The Bottom Line

While Twitter’s latest results were in no way disastrous, the market’s harsh reaction boiled down to muted Q1 results compared to other tech behemoths and subdued Q2 guidance. Following this, there was a fair bit of pessimism amongst analysts as reflected by lower earnings forecasts and reduction in price targets.

On the bright side, revenue forecasts haven’t seen much of a change suggesting sales are tracking in line with expectations. Additionally, our data suggests that revenues are expected to grow faster than the wider.

To conclude, it remains to be seen how the changes undertaken by the company would profit the business. Interested investors should spend more time familiarizing themselves with the company’s business model and assess if the stock has any visible long-term upsides. A good place to start your research would be to check out long-term forecasts for Twitter going out to 2025, which you can see for free on our platform.

Along with that, it’s also necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Twitter, and understanding them should be part of your investment process.

Simply Wall St analyst Kshitija Bhandaru and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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