Should You Buy Twitter?

Morningstar analysts consider Twitter's initial IPO share price to be undervalued - by 40%. Could this be an opportunity for investors?

Rick Summer, CFA, CPA 1 November, 2013 | 2:48PM

In our opinion, Twitter (TWTR) has only just begun to turn on its monetization engine for more than 230 million monthly active users, or MAUs. Although arguably the company has not yet penetrated the mass market, we believe it will succeed in simplifying its applications, improving accessibility for users, and delivering a more pervasive Twitter experience.

In our initial report, we highlighted the company's narrow economic moat and trends that may ultimately support a wide moat rating. With a growing ecosystem of content partners, media, celebrities, and engaged users, we expect the company to expand its user base and its monetization capabilities through new ad products. User growth will help expand the company's reach, and we believe will provide the critical mass necessary to capture new advertising budgets that depend on reaching a minimum number of users. Furthermore, engaged users will be locked into the differentiated content platform, strengthening the network effects and increasing advertising spending.

Key Points

Our fair value estimate ($26 per share) is 40% above the $18.50 midpoint of Twitter's initial pricing range. We believe the opportunity for capital gains is greater than the probability of capital loss, and have used a weighted average of three different scenarios in calculating our fair value estimate.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Rick Summer, CFA, CPA  Rick Summer, CFA, CPA, is a senior stock analyst with Morningstar.

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