Twitter Stock Wins 2 Buy Ratings: What You Need to Know

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Little-known Summit Redstone and giant JPMorgan both love Twitter.

After underperforming for most of the year, shares of Twitter (NYSE: TWTR) stock are leaping ahead to outperform the S&P 500 in the waning days of 2017. For this you can thank friendly analysts at two Wall Street banks, Summit Redstone (which S&P Global Market Intelligence tells us is a division of WR Hambrecht) and JPMorgan Chase, both of which rated Twitter a buy this morning.

Here's what you need to know about these upgrades.

What's Twitter done lately?

Let's start with a few numbers. When Twitter last reported earnings -- very well received earnings -- in October, the company was still suffering on the revenue front, with sales down 4% year over year in fiscal Q3. Twitter lost money in the quarter -- $0.03 per diluted share -- but it lost less money in Q3 2017 than it did in Q3 2016.

What JPMorgan expects Twitter to do next year

In its upgrade this morning, investment banker JPMorgan predicted a continuation of this trend of strengthening GAAP profits at Twitter in 2018. In the coming year, says JP, investors can expect to see Twitter grow its ad revenue by about 8.6% as daily average users (DAU) of Twitter's website increase by 10%.

A more engaged user base, combined with strengthening revenue, will turn Twitter "GAAP profitable in 2018," according to JPMorgan, "even after increasing investments, as it benefits from revenue-driven margin expansion."

Twitter stock is already up 22% over the past year. Now JPMorgan is predicting that 2018 will see the stock rise a further 14% to a new target price of $27 per share.

Summit's verse, same as the first

Summit Redstone's feelings about Twitter are similar. Although Summit hadn't been following Twitter previously, the analyst believes that now is a good time to get into Twitter stock ahead of a 2018 revival.

"User growth and engagement traffic have stabilized and even started growing," according to Summit. The analyst believes that 2018 offers Twitter "an opportunity for revenue pick-up," and argues that the stock should be worth about $26 by the end of next year, justifying an initiation of Twitter stock at buy.

Bonus thing: What the numbers say

On their face, the predictions that JPMorgan and Summit Redstone are making for Twitter stock don't look terribly extreme. JPMorgan's predicted 14% price rise in 2018 -- right after Twitter just jumped 22% in 2017 -- doesn't seem overly optimistic in light of the analyst's expectation that Twitter will achieve full-year GAAP profitability for the first time ever. (Note that most Wall Street banks are still predicting that Twitter will lose money next year.) Summit Redstone's prediction of a 9% price pop could be even more modest in the event that Twitter succeeds in turning itself profitable next year.

Plus, let's not forget that while Twitter remains GAAP-unprofitable for the time being, it is generating significant cash profits in the form of free cash flow. According to S&P Global data, over the past 12 months, Twitter churned out $664 million in positive free cash flow from its business.

Granted, weighed against the company's $17.7 billion in market capitalization, that works out to a price-to-free-cash-flow ratio of 26.6, which isn't exactly cheap. Our next step will be calculating whether 26.6 is too much to pay for Twitter stock -- a determination that will depend largely on how fast the company can grow its profits once it achieves GAAP profitability.

The good news is that -- if JPMorgan is to be believed, at least -- next year Twitter will finally have some positive GAAP profits to grow.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.