Twitter: Don’t Let the Rally Fool You — Watch the Earnings Instead

Twitter

Source: http://www.flickr.com/photos/johanl/

Twitter (NYSE:TWTR) will report its first earnings as a public company on Wednesday after the closing bell, and the markets are all aflutter. Shares of the social media company opened higher, dipped lower, and began returning to equilibrium by noon as traders digested the pre-announcement sentiment: Analysts expect Twitter to post revenue of $217.82 million and a loss of 2 cents per share. All told, a good prognosis for a company surrounded by more hype than reporting history and, within that limited history, has yet to turn a profit.

But the consensus estimate is just an average derived from a broad spectrum of estimates. Analysts have targeted fourth-quarter revenues anywhere between $195.01 million to $238 million, and earnings estimates range from a loss of 13 cents per share to a gain of 4 cents. This is pretty swingy, but not at all unexpected. Analyst reports released since the company’s initial public offering have revealed mixed if not contentious opinions on the company and its stock.

At the beginning of January, for example, analysts at Morgan Stanley downgraded the stock from Equal-weight to Underweight, placing a $33 price target on shares that were trading at nearly $65 at the time. “Twitter currently trades at a premium to peers and is above our bull case,” the firm said in a note. Morgan Stanley is looking for Twitter to trade at 14 times revenue and 84 times 2015 EBITA. Morgan Stanley’s price target compares against a median analyst price target of $50 per share, which is up about $4 over the past month.

In December, analysts at CRT Capital raised their price target on Twitter stock to $65 per share but downgraded its Buy rating to Fairly Valued. That meant a price-to-sales of about 67.6, about where the stock was as of February 5.

In the middle of January, Goldman analyst Terry Heath suggested that a “significant acceleration in the pace of Twitter’s product innovation” is “indicative of the company’s ongoing capabilities now that site stability issues have been resolved.” This acceleration and the capabilities it represents, means more rapid and effective monetization for the social media company. Along with a price target increase to $65 from $46, Heath upwardly revised his earnings targets for fiscal years 2013 through 2015.

Fiscal 2013 earnings are expected at a loss of $3.35 per share, up from a loss of $3.37 per share; fiscal 2014 earnings are expected at a loss of 70 cents per share, up from a loss of 71 cents per share; and fiscal 2015 earnings are expected at a loss of 69 per share, up from a loss of 72 cents per share.

Twitter stock has advanced more than 47 percent since the end of its first trading day (and about 150 percent from its IPO price), but Wednesday’s earnings will set the tone for the coming quarter. Businessweek head of research Eric Chemi argues that Twitter’s fourth-quarter stock action has effectively zero predictive power over the coming quarter or year. What the earnings reveal about the company’s development, though, could make or break investor sentiment.

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