Twitter Is Getting Smoked

Twitter is getting smoked this morning after last night’s earnings report.

The stock is off by 13.3% in pre-market trading. It’s at $US42.15.

Twitter’s numbers were all right in line with analyst expectations. Revenue was even slightly ahead of expectations.

It wasn’t good enough.

Ben Schachter at Macquarie Research put it best, saying, “For a stock trading at ~30x ’16 EBITDA, it needs to be beating meaningfully, and cleanly, on all metrics.”

Analysts at Bank of America and RBC downgraded the stock from buy to hold.

Here, via Street Insider, is why Bank of America downgraded the stock, and cut its price target to $US50, from $US60:

“Our thesis on the stock was based on: 1) revenue upside from new ad formats, 2) improving MAU trends from product changes, and 3) opportunity to convert or monetise non-logged in users. Call commentary suggest that these opportunities still exist (11/12 analyst day will highlight opportunities), but 4Q guidance suggests the ramp will not be consistent and or as fast as we expected to drive stock higher near-term, and we have less confidence in the long-term MAU ramp.”

That last part is key. Analysts are worried that Twitter’s guidance suggests another quarter of weak user growth.

This is the big problem for Twitter. It’s a mainstream product that is well-known around the world, but it has failed to gain a global audience of logged-in monthly users. Until it can either prove that it can become a Facebook-sized company measured by users, OR become a Facebook-sized company measured by revenue, then these questions will dog it.

Here are some other analyst takes on the results.

Doug Anmuth at JP Morgan:

TWTR’s 3Q results & 4Q outlook were light relative to above-guidance expectations. With investor focus on users, MAU net adds of 13M Q/Q came in a couple million light vs. the Street and below our 17M, but were also impacted by 1-2M due to tighter authentication efforts in Asia. Ad revenue of $US320M increased 109% Y/Y, slightly below our $US325M and bullish expectations, but revenue/1,000 TLVs increased 83% Y/Y as TWTR continues to show strength in monetization. EBITDA was a standout, with margins increasing more than 1,300bps Y/Y to nearly 19%. However, much of the focus will be on TWTR’s 4Q outlook which suggests single-digit MAU net adds along w/revenue & EBITDA essentially in-line w/pre-earnings consensus. We believe the 4Q guide could be conservative, but we recognise there is seasonality in MAU adds, & TLV/MAU are likely to be flattish Y/Y. TWTR’s user metrics are choppy, but they also remind us that it’s early for the company in terms of product quality & facilitating engagement. We are encouraged by the Q/Q step-up in US MAU net adds of 2.6M to 3.6M, & we continue to believe that onboarding improvements, rich content, & better timeline organisation can drive user growth going forward. We expect TWTR shares to be under pressure in the near term, w/ investors looking for greater clarity at the Nov 12 analyst day, but we believe this pull-back will prove to be a good buying opportunity based on improvements in products & user growth, monetization, & margin expansion. We are maintaining our Overweight rating w/a 2015 year-end price target of $US64 based on our DCF analysis, which also equates to ~44x 2016E EBITDA of $US991M.

Victor Anthony at Topeka:

Following what was supposedly a break-out 2Q, 3Q, was overall, an in-line quarter, and call commentary on 4Q guidance and on implied 4Q user growth was cautionary. For a stock trading at a high multiple, although supported by high growth, an in-line quarter and cautious comments are likely to result in share price volatility (shares up 65% since the Spring). We believe management is managing Street expectations and ad growth and user growth for 4Q are likely to exceed guidance. The pullback should be viewed as an opportunity to own the stock. PT reduces to $US60 from $US63.

Ken Sena at Evercore:

While MAUs (users) were inline and the quarter’s financial performance and guide exceeded, commentary on the call felt more cautious on engagement metrics, future guides, and the timing for which it hopes to monetise its non-core user base. This is leading us to dial back our conviction level on shares and lower forward estimates, which had been among Street high.

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