Why Hedge Funds Are Buying Twitter Like Crazy

Over the past week shares of Twitter (TWTR) have been on fire. The social media company's stock price has soared from $40.69 one week ago to $52 at the time this article was written on Tuesday.

Last week Twitter rolled out an improvement to one of its marketing features to help advertisers to better target its 230 million+ users.

The new addition helps advertisers do a better job of reaching users who have previously displayed interest in their products based on web-browsing histories. Twitter's massive base of users and improving monetization has hedge funds and independent analysts thinking that revenue will grow at a much quicker pace than Wall Street does.

The sell-side analysts that make up the Wall Street consensus have been notorious for underestimating the growth rates of social media companies. The information below is derived from data submitted to the Estimize platform by a set of Buy Side and Independent analyst contributors. You can share your own estimates as well by visiting www.estimize.com.

As displayed above the consensus from Estimize has been more accurate in forecasting Linked In's (LNKD) earnings-per-share 6 out of the past 7 quarters. Over the same timeframe Estimize has been more accurate every single time in predicting Linked In's revenue.

The table for Facebook (FB) tells a similar story. The community consensus from Estimize has been more accurate in forecasting EPS 4/7 times and more accurate on revenue 6/7 times. So why can't Wall Street get social media right?

Part of the problem is a misalignment of incentives, the primary motivation of a sell side analyst is NOT to be accurate. The accuracy of Wall Street earnings expectations are crippled by a "don't stray from the herd" mentality. As long as they keep their estimates in-line with one another, then no one can be singled out for poor performance. They face a bias where accuracy is sacrificed for job security.

That's why we launched Estimize where analysts can share their earnings estimates publically or pseudonymously and compete to be the best. By crowdsourcing earnings estimates the Estimize community has built a data set that is up to 69.5% more accurate than Wall Street. Rankings and confidence ratings for each user are calculated through algorithms developed by our deep quantitative research which look at correlations between analyst track records and tendencies as they relate to future accuracy. Here is what our community is expecting from Twitter's FQ4'13 earnings report in mid-January.

The verdict from our community is that Twitter will experience accelerated quarter over quarter revenue growth this period. The Estimize consensus which was extremely accurate in predicting revenue last quarter is expecting Twitter to report FQ4'13 earnings of $212.65M while Wall Street is forecasting $208.06. The Estimize community is predicting continued quarter over quarter growth throughout the next 6 months while Wall Street is expecting a revenue decline in FQ1'14. The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case because of the difference in expectations we are seeing a much larger delta than usual for revenue in that quarter. For more information about alpha generating strategies utilizing the Estimize data set to find pre-earnings drift opportunities check out our whitepaper.

The analyst with the highest confidence rating for next month's report is princebhojwani who is ranked 35th overall among 3328 contributing analysts. princebhojwani is expecting -3c EPS and $212.00M revenue which is very much in-line with the Estimize community consensus.

Our community seems to agree that like other social media companies this year, Twitter will exceed the Wall Street expectations. If Twitter can continue to improve the effectiveness of advertising to its 230 million+ users we can only expect its revenue to continue to grow.

Get access to estimates for Twitter published by your Buy Side and Independent analyst peers, and register to create your own estimates by heading over to Estimize now.