We believe that the companys focus on its core

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key business metrics. We believe that the company’s focus on its core product, strong compatibility with mobile devices, and adoption by celebrity culture bode well for its ability to sustain and even deepen its competitive moat. COMPANY DESCRIPTION Twitter calls itself “a platform for public self-expression and conversation in real time.” Twitter remains true to its initial format, with tweets limited to 140 characters of text, but is experimenting with longer-format tweets. Any user can create a tweet, and any user can follow other users with no restrictions. The company now accommodates videos, music, sports events, games and other media content. INDUSTRY Our rating on the Technology sector is Over-Weight, as we see value in Tech stocks following the recent selloff. Over the long term, we expect the Tech sector to benefit from pervasive digitization across the economy, greater acceptance of transformative technologies, and the development of the Internet of Things (IoT). Healthy company and sector fundamentals are also positive. For individual companies, these include high cash levels, low debt, and broad international business exposure. The sector is outperforming the S&P 500 thus far in 2018, with a gain of 3.2%. It also outperformed in 2017, with a gain of 36.9%, and in 2016, with a gain of 12.0%. Fundamentals for the Technology sector look reasonably balanced. By our calculations, the P/E ratio on projected 2018 earnings is 17.8, above the market multiple of 16.7. Earnings are expected to grow 24.3% after rising 33.2% in 2017. Earnings rose in the low single digits in 2015-2016. The sector’s debt ratios are below the market average, as is the average dividend yield of 0.8%. VALUATION TWTR shares represent investment in a growth story and, as such, traditional valuation metrics are of limited use, particularly in comparisons with more mature peers. TWTR is also a volatile stock, as evidenced by the sharp selloffs in 2015 and 2016 and sharp price swings in 2017. At current prices, TWTR trades at 44.0-times our 2018 non-GAAP EPS estimate and at 37.3-times our 2019 projection; the trailing three-year (2015-17) P/E is 51.1. With revenue, earnings and cash flow all growing rapidly, price-based historical comparable valuation renders a value in the mid-$50s, in a rising trend. Peer analysis suggests that TWTR trades in line with peers on P/S and EV/EBITDA, but increasingly at a discount on P/E. Our more forward-looking discounted free cash flow analysis values TWTR in the low-$40s, in a rising trend. Our blended valuation model points to value above $55 per share, in a rising trend. Appreciation to our target price of $40 implies a risk-adjusted return that exceeds our forecast for the broad market. On that basis, we believe that TWTR merits a BUY rating. We recommend TWTR for highly risk-tolerant investors with the patience for what will likely be a long-term turnaround.
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