Will Twitter Surprise Tomorrow?

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Twitter Inc. TWTR is set to report fourth-quarter and full year 2014 results on Feb 5. Last quarter, the company posted a loss of 27 cents per share, which came in line with the Zacks Consensus Estimate.

Let's see how things are shaping up for this quarter.

Why a Likely Positive Surprise?

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at +4.76%. This is a meaningful and leading indicator of a likely positive surprise for the company.

Zacks Rank: Twitter carries a Zacks Rank #3 (Hold). Note that stocks with Zacks Rank of #1, 2 and 3 have a significantly higher chance of beating estimates.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

The combination of Twitter's Zacks Rank # 3 (Hold) and +4.76% ESP makes us confident in looking for a positive surprise on Feb 5.

What is Driving the Better-than-Expected Earnings?

Investors are expected to keenly follow Twitter's user growth rate and engagement in the fourth quarter.

The increasing mobile user base should drive mobile advertising revenues. In the third quarter of fiscal 2014, its mobile user base (80% average MAUs accessed Twitter from mobile) increased more significantly than the desktop user base. Per Gartner, mobile advertising spending is forecast to reach $18.0 billion in 2014, while the market is expected to grow to $41.9 billion by 2017. Twitter is well positioned to benefit from this higher spending due to its innovative product portfolio that continues to attract advertisers (its primary revenue source).

In this context, the company recently partnered with news-reading app Flipboard and Yahoo

Japan to expand its advertising business beyond social media subscribers. In addition, it is also looking to expand in emerging markets like India with the prospective buyout of a startup, ZipDial. The company was established in 2010 and offers mobile marketing and analytic services. The acquisition will not only help Twitter acquire a major interface between the consumer and business segments but will also help promote its own user base.  

In addition, Twitter has been endeavoring for quite some time to enhance its operational sphere in order to seek revenue sources other than advertising.

Last year, the company launched its much-awaited "Twitter Buy" to enable customers to search for products of their choice and buy them on its platform.

We believe that the development of additional services on its platform will drive top-line growth, going forward. However, rise in costs remains a concern as Twitter continues to invest in product development, acquisitions as well as sales and marketing. Intensifying competition from Facebook, Inc. FB and Google Inc. GOOGL are the major headwinds.

Stocks to Consider

Here is another stock worth considering that, as per our model, has the right combination of elements to post an earnings beat this quarter:

Demandware, Inc. DWRE, with an Earnings ESP of +25.00% and a Zacks Rank #3.