In previous articles from the investing checklist series, we’ve examined Google’s business using the Phil Fisher Growth checklist, and also determined PepsiCo to be a reliable stalwart stock using Peter Lynch’s Stalwart checklist.
One of the pre-existing checklists GuruFocus provides on each company’s page is the Peter Lynch Fast Grower list. These 18 questions can help you determine if a stock is a solidly financed, fast grower, selling at a reasonable price.
Twitter’s (TWTR, Financial) most recent quarterly earnings made several headlines when it posted good revenue growth, but slow growth in its number of users. As a high-profile social media stock, it can be helpful to evaluate whether Twitter currently has the business potential to be considered a fast grower.
Does the company have a diversified customer base?
Twitter has about 284 million monthly active users, 77% of these accounts are outside the U.S. As of May, the top three countries on Twitter in terms of per capita use are Kuwait, Netherlands, and Brunei, while the top three countries in terms of absolute number of users are U.S., U.K., and Canada.
As Twitter supports more than 35 languages, the site certainly has a diversified user base. It can appeal to almost anyone for a number of different purposes, whether a user simply wants to follow celebrities, or promote themselves in their career.
Does the company still have room to grow? Has the company duplicated its successes in more than one city or town to prove that expansion will work?
In terms of the second question, Twitter has already proved its appeal to users across the world, as shown above.
During the third quarter, Twitter’s revenues rose sharply, but what has analysts and investors worried is the slowing of user growth. The monthly average number of users worldwide grew 5%, compared to 6% in the previous two quarters. The number of timeline views worldwide increased only 4% quarter-over-quarter, compared to 11% in the second quarter.
Twitter’s challenge, like most other companies, will be to innovate and drive the growth of its users.
“The experience on Twitter today is the same experience people have always had on Twitter,” said Nate Elliot, a social media analyst at Forrester in the New York Times.
Does the company have meaningful profit margin (10% or higher)?
Twitter’s profit margin was -48.5% in the third quarter.
Does the company have a higher margin than competitors?
Twitter has the lowest margin among other social media platforms. For comparison, LinkedIn’s net margin was -0.74% in the most recent quarter, while Facebook’s is a much higher 24.7%.
Does the company have a stable margin or even increasing margin?
With only four full fiscal years of data to examine, it’s difficult to discern an accurate trend. The highest margin was in FY 2012 at -25%; some analysts estimate the company will turn a profit in 2015.
Is the growth speeding up? Is the earnings growth to date consistent?
EPS without non-recurring items was $-0.68 in FY 2012 and $-3.41 in FY 2013. With only two years of data, it’s difficult to do an analysis of earnings growth.
How did the company’s business fared during previous recessions?
Twitter only began offering advertising with its Promoted Tweets in 2010, so its business can’t be evaluated for the most recent recession.
How did the company’s stock price fare during the previous recessions?
Twitter was not a public company during the last recession from 2007 to 2009.
Is the balance sheet strong?
The current ratio, which is found by dividing current assets by current liabilities, is 9.4. This indicates the company can cover its liabilities several times over, but may be holding too much cash that could be used to expand or invest. The cash-to-debt ratio is 2.39, meaning Twitter is in a good position by building cash through its operations rather than issuing debt. The company’s debt-to-equity ratio during the most recent quarter was 0.43, a relatively low number. A higher ratio can indicate that a company is financing its growth with debt.
Overall, Twitter has a very strong balance sheet, and can afford to put money into new ventures and innovations in its business.
Is the product that’s supposed to enrich the company a major part of the company’s business?
Twitter’s product is a platform that enables users to share ideas and information with no barriers. With 284 million monthly active users, Promoted Tweets monetize this user base by allowing companies to place Tweets on the timelines of their targeted audience. Therefore, the product does contribute a major part of Twitter’s business.
What is the growth rate? 20% to 25% is the optimum rate.
The following chart depicts Twitter’s revenue and net income over time.
Over the past 12 months, the revenue growth rate was -30.8%, while book value growth was 332.6%.
Is the stock selling at a P/E ratio at or near growth rate?
Twitter does not currently have a P/E ratio since it has not earned a profit.
P/E ratio, high or low relative to historical value? The lower, the better.
N/A
P/E ratio relative to similar companies? The lower, the better.
LinkedIn also does not currently have a P/E ratio, though it was 942 in FY 2013. Facebook’s current P/E ratio is 76.5.
What is the percentage of institutional ownership? The lower, the better.
Institutional ownership stands at 64%. This is higher than Facebook’s institutional ownership of 51%, but much lower than LinkedIn’s 81%.
Are insiders buying?
Insiders are not buying shares, according to GuruFocus data going back to June 2014.
Is the company buying back shares?
No, Twitter has yet to begin a share repurchase program.
Twitter’s final score according to the checklist is 2.8/5.
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