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Collecting a Franchise Name

Stock (Symbol) Stock Price

Twitter (TWTR)

$40

Data is as of Expected to Report Sector

November 6, 2014

Feb 5

Technology

Sharek’s Take
David SharekOne thing I’ve noticed in evaluating myself is I haven’t owned franchise names as they made runs higher because I felt their P/Es were too high. I didn’t buy Tesla or LinkedIn at $90 and now they are past $200. Netflix I sold at $100 and now its $450. I also sold Chipotle and Amazon because the P/Es were high and have seen them more than double as well. But throughout history, P/E ratios have not been a factor when searching for top stocks — earnings growth is what matters. What we need to do is own the growing franchise names. One franchise that hasn’t gone on a run higher is Twitter (TWTR). Twitter is spending to grow its business, and its P/E is high because its blowing through cash. But TWTR is low when you look at the chart — it’s on a dip. TWTR reports earnings two days from now and I feel there’s a strong chance the stock could start its move higher, thus I will buy TWTR in the Growth Portfolio. TWTR has never made more than 2 cents in any qtr, and is expected to make 6 cents this qtr. If the company beats, the stock could soar. Twitter doesn’t put many ads in its feed, if or when it follows in Facebook’s footsteps and does so the company could have a windfall of profits.
One-Year Chart
TWTR_2014_Q4Here’s the one-year chart of TWTR. When the stock was high everyone was saying Facebook was a better deal, which was true. But FB has since doubled and TWTR has lost half its value. What’s bad is TWTR sells for 118 times 2015 profit estimates, what’s good is profit growth is expected to be 200% and 400% the next two qtrs.
Earnings Table
TWTR_2014_Q4_EPSLast qtr TWTR had profit growth of 133% on a 114% jump in sales.
 
The company met estimates last qtr, but had beaten by at least 3 cents in the three qtrs prior. Remember that.
 
Annual Profit Estimates stayed about the same. The company could earn $1 in 2017.
 
Quarterly estimates is where things get interesting. Throughout history there have been major moves by stocks just as they reach profitability. With TWTR, it’s earned 2 cents twice since coming public. But look at the estimate next qtr: 6 cents. A HUGE jump from anything the company ever made. This could be the turning point for this stock. Plus, what if TWTR beats by 3 cents? A 9 cent profit vs 2 cents a year-ago?
Fair Value
TWTR_2014_Q4_PHAlthough I feel Titter is overvalued right now, I have to collect it on a dip, as I have made the mistake of passing on top stocks on dips in the past and have gone on to see them soar. Franchise names are almost always expensive to buy. The key with TWTR is the company could earn $1 someday (2016? 2017?) and 40x that is $40. And it could earn more — a lot more.
Ten-Year Chart
TWTR_2014_Q4_10yrThis stock’s been on a wild ride because investors got too infatuated with the stock. But now I never hear anyone talk about TWTR as an investment — its under the radar believe it or not.
Power Ranking Bottom Line
Growth Portfolio

18 of 25

I have a hunch that Twitter is set to go on a run higher, but if it doesn’t its a great franchise that we collected. Sales are doubling and companies like that are hard to find. Twitter isn’t putting many ads on its feed right now, but when it capitalizes on this opportunity profitability will awaken.
 
TWTR will be ranked 18th of 25 stocks in the Growth Portfolio Power Rankings. I won’t add it to the Aggressive Growth Portfolio yet because the stock isn’t timely, the P/E is very high, and this portfolio only has 12 stocks so I don’t want to take the risk.

Aggressive Growth Portfolio

N/A

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