The Pros And Cons From Twitter's Q2 Earnings Report

Still spooked by Twitter Inc TWTR’s sequential quarterly drop in monthly active users (MAU), investors sustained Friday’s earnings sell-off into Monday.

Analysts reacted less drastically, though.

The Pros

Twitter beat estimates for revenue and earnings before interest, tax, depreciation and amortization (EBITDA) by 1 percent. It posted 29-percent annual growth in data licensing, and MAUs grew 3 percent year-over-year. Daily active user (DAU) growth accelerated from 10 percent in the first quarter to 11 percent in the second, and ad engagement similarly accelerated from a 69-percent rise to 81 percent.

“While the print may have disappointed the uber-bull camp, we actually see it as stable and think TWTR’s steps toward improving the health of the platform should help in the long run,” Barclays analysts wrote.

Its analysts were particularly heartened by accelerated revenue growth in owned and operated (O&O) advertising. Meanwhile, Baird Equity Research found monetization momentum was largely overshadowed by concerns around MAU and margins.

“Twitter's pace of execution on key growth initiatives (streaming partnerships, new ad formats, user engagement) is encouraging, but we think shares are likely to remain under some pressure until visibility improves for user growth and spending trends,” Baird wrote.

The Cons

Soft MAU growth and heightened investment in platform improvements were primary concerns. Some analysts also noted a 12-percent quarter-over-quarter drop in off-site ad network revenue.

Barclays was troubled by Twitter's high EBITDA multiple and mid-teens EBITDA compound annual growth rate. The core EBITDA metric “broke a multi-quarter streak of more meaningful upside,” and it fell short of KeyBanc expectations as clean-up efforts drove costs higher.

Related Link: A Trader Was Aggressively Buying Twitter Shares Thursday Night, Just Hours Ahead Of The Q2 Print

Outlook And Estimates

Guidance also disappointed as it trended below Street estimates and implied a difficult near-term environment.

Third-quarter outlook suggests deceleration in revenue growth rates, further MAU declines and EBITDA margin compression. At the same time, annual capex guidance increased from between $375 million and $450 million to between $450 million and $500 million.

“We would expect less ongoing optimism for continued financial upside in the stock,” Bank of America Merrill Lynch wrote.

Its analysts cut revenue growth and margin estimates in anticipation of headcount increases and a rise in health investments. For 2019, they lowered their EBITDA estimate from $1.3 billion to $1.2 billion and forecasted 10-percent revenue growth.

They expect platform improvements will be needed to drive the DAU-MAU ratio higher, but KeyBanc isn’t too hopeful.

“We believe upside to current levels would require growth in the overall user base, which we see no evidence of at this point,” KeyBanc analysts wrote. “[...] Changing the perception of an established social media service to entice new user growth, not just growth in DAUs within its MAU base, is a significant challenge to overcome going forward.”

BMO Capital Markets is more optimistic that margin-pressuring investments in safety and security will pay off.

“MAUs are expected to decline sequentially, negatively impacting revenue short-term; long-term we think it delivers improvement to platform health,” BMO wrote in a note.

Barclays also targets deceleration in O&O growth in the third and fourth quarters.

Like Bank of America, KeyBanc cut its 2018 and 2019 EBITDA estimates from $819 million and $954 million to $757 million and $860 million, respectively. Baird similarly chopped its forecasts to $1.08 billion and $1.21 billion.

Ratings

Bank of America expects Twitter to trade at a higher premium to peers considering its lower penetration and higher growth opportunity.

• Baird maintained a Neutral rating but raised its price target from $33 to $35;
• Bank of America Merrill Lynch maintained an Underperform rating with a $27 target;
• Barclays maintained an Underweight rating with a $24 price target;
• BMO Capital maintained a Market Perform rating with a $31 target; and
• KeyBanc maintained a Sector Weight rating with a $42 fair valuation.

At time of publication, Twitter's stock was trading down 8 percent at $31.34