Twitter To Report Q2 Earnings: What Might Be Expected?

Social network Twitter Inc TWTR reports second-quarter earnings on July 27 before the opening bell. Since its last earnings report, the stock is up quite a bit on the year and has recovered from its slide in the first quarter.

One of the main reasons for the stock’s rally since the last quarter is the better-than-expected user growth Twitter reported in its first-quarter results. Daily average users increased 14% year-over-year, which was the company’s fourth consecutive quarter of accelerating growth according to a company press release.  In the first quarter,  monthly active users increased 9% year-over-year to a total of 328 million. In the past, many analysts have expressed concerns about Twitter’s slowing user growth rates.

In addition to a slowing user growth rate, revenue growth had also been decelerating in recent quarters, and turned negative last quarter with the company reporting 8% year-over-year decline. As it faced revenue headwinds, Twitter said it is focused on streamlining its cost structure and achieving greater operating efficiency. Twitter management primarily attributed the cause of the revenue headwinds to a competitive digital advertising market.

As the digital advertising market grew more competitive over the years, Twitter has undergone a number of management changes. Most recently, it was announced that Ned Segal would be replacing Anthony Noto as CFO. In May, co-founder Biz Stone announced that he would be returning to work full-time at the company as well.

On top of management changes, there have been a number of changes to the platform as well. In June, Twitter rolled out its biggest redesign in years, largely focused on improving the user experience by making it “faster and easier to use”, the company said. It has also focused on improving the user experience by reducing online harassment, which CEO Jack Dorsey has acknowledged as a problem for the company in the past. In its recent letter to shareholders, the company said “we’ve made meaningful progress toward identifying and removing  accounts that demonstrate abusive behavior.”

In recent quarters, Twitter has also continued its push towards more video content since launching live video on its platform two quarters ago. In May, the company announced 16 new live streaming deals covering  a mixture of sports, news and entertainment. Video has been widely considered a growing opportunity for many companies that sell digital advertising.

FIGURE 1: RALLYING SINCE MID-APRIL. After posting better-than-expected user growth in the first quarter, TWTR has increased more than 40% and is up 21.47% year-to-date compared to the S&P 500’s (SPX) 9.71% increase. Chart source: thinkorswim^® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Twitter Earnings and Trading Activity

For its Q2 results, Twitter is expected to report earnings of $0.05 per share, down from $0.13 in Q2 2016, on revenue of $536 million according to Wall Street consensus analyst estimates. The company has either come in at the high range of analyst estimates or beat them in the past eight quarters. 

The stock hit a 52-week low of $14.12 shortly before its first quarter earnings came out, but gapped up following the company’s results that showed better-than-expected user growth. After the stock’s recent run, its up 21.47% year-to-date, but still remains below its IPO price of $26 per share.

With shares closing at $19.97 yesterday, traders have priced in about a 10% potential share price move in either direction around the company’s earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading leading up to the earnings release at the July 28 expiration, calls have been active at the 20 and 20.5 strike prices and puts have been active at the 18.5 and 20 strikes. As of this morning, the implied volatility sits at the 55th percentile. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

Amazon.com, Inc. AMZN will be one of the widely watched earnings releases this week and the company is set to report tomorrow after market close. On top of Amazon, oil giants Exxon Mobil Corporation XOM and Chevron Corporation CVX report on Friday before market open. And if you have time, make sure to check out today’s market update to see what else is happening.