Morgan Stanley has downgraded Twitter stock to “underweight” with a price target of just $US24, below the ~$US30 it is trading at.
In a blistering note, titled “A Moment Too Late?” Morgan Stanley’s analysts say Twitter shows signs of limited user growth, declining engagement, a lack of material, incremental advertiser demand, an already-high ad load and ad pricing, and rising competition from rivals in the mobile space.
Twitter’s stock fell ~4% in pre-market trading, following the publication of the note.
Business Insider has reached out to Twitter for comment.
Here’s where Morgan Stanley thinks Twitter is going wrong.
Twitter is performing well below Wall Street expectations
Morgan Stanley says the Street is calling for Twitter to double its revenue base by 2017, even though its monthly active user growth is decelerating year-on-year. Twitter’s run rate is 18% below that 2017 target, and it is 25% low on earnings (Ebitda).
It will be a long slog ahead for Twitter to reach that lofty Wall Street revenue target. Morgan Stanley estimates revenue per user would have to grow at a compound annual growth rate of 32% — to $US12.73 from $US7.53 — just to reach those Street numbers.
Twitter is reaching an ad-load ceiling
Morgan Stanley thinks Twitter will struggle to get there in part because its analysts believe the social-media site can’t keep shoving more and more ads in front of users. Morgan Stanley’s analysts estimate that Twitter’s ad load is already 10 times as high as Facebook’s when adjusted for time spent.
This increasing ad load will most likely negatively affect the effectiveness of ads, and it could even turn users away from the platform. That’s not good at a time when user engagement is already down — average time spent per mobile user was down 33% year-over-year in the third quarter of 2015, according to Morgan Stanley.
Its analysts also believe that monthly active user growth going forward will most likely be “tepid.”
Twitter’s ad pricing is high enough as it is
Morgan Stanley estimates that Twitter’s mobile CPM (the cost to reach 1,000 users) is already at a 13% premium to Facebook’s.
Using Twitter’s TWTR ticker, the note says: “In addition, some of our TWTR agency conversations remain tepid, with marketers flagging TWTR’s limited scalability (aka reach) as a factor holding back ad budgets. The competition for users’ time and advertisers’ mobile and social ad dollars is rising, too, as other platforms — like Instagram, Snapchat, and YouTube — with stronger user and/or engagement growth continue to increase their push for ad dollars.”
Morgan Stanley says its call to downgrade Twitter’s stock could be challenged if the company somehow manages to re-accelerate monthly active-user growth.
Twitter made a big bet to do just that with the launch of its new Moments feature that highlights the best tweets around certain events, in a bid to capture the interest of new and lapsed users and help them understand the value of Twitter better.
Morgan Stanley, however, says Twitter’s efforts may be too little too late.
“It is too early to say ‘Moments’ is a success, and we question whether it may be too late to meaningfully change TWTR consumer perception and behaviour,” the note says. “Fewer MAUs means even less time to monetise.”
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