MKM Partners: Twitter Has Potential For 30-40% Annual Returns

Twitter Inc TWTR shares experienced a pullback after the social media platform's July 27 second-quarter earnings release as traders reacted to a decline in monthly active user metrics and sour guidance. The stock movement amounts to a healthy reset amid strong fundamental momentum, according to MKM Partners. 

The Analyst

MKM's Rob Sanderson maintained a Buy rating on Twitter with a $43 price target.

The Thesis

Twitter's content story is "unique, resilient and improving," with the addition of video serving as a strong driver of engagement, Sanderson said in a Thursday note. (See the analyst's track record here.)

In Q2 alone, the company added 50 new video deals, the analyst said. 

Twitter's network health focus, despite its downward effect on user metrics, is a clear positive due to its success in improving quality, Sanderson said. 

Twitter's focus has shifted from audience and engagement growth to network health and GDPR, he said. 

MKM Partners attributed strong volume growth to engagement growth and improving click-through rates. Due to the spike in volume, price per engagement fell by 32 percent, Sanderson said. 

These factors point to a meaningful improvement in return on investment for Twitter advertisers, the analyst said. 

"If Twitter gets to Facebook, Inc. FB's 2017 monetization rate by 2021, we think the stock can return 30 percent to 40 percent per year through 2020." 

The Price Action

Twitter shares are up about 47 percent year-to-date. The stock was trading up 1.05 percent to $35.71 at the time of publication Thursday.

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