Twitter's User Growth Is Impressive, But There's Too Much Near-Term Uncertainty

Twitter Inc TWTR shares got a boost this week after the company reported much stronger-than-expected user numbers in the second quarter. However, ad revenue dropped 23% on the quarter, highlighting that Twitter is not immune to the pressures weighing on other social media platforms as well.

Twitter reported a second-quarter loss per share of $1.39 on revenue of $683 million. Analysts had been expecting $707 million in revenue.

Twitter reported 186 million monetizable daily active users (mDAUs), well ahead of analyst estimates of 172.8 million. Twitter’s mDAUs were up 34% from a year ago.

Too Much Uncertainty: Canaccord Genuity analyst Maria Ripps said there are simply too many near-term uncertainties for Twitter shares to have much upside at its current valuation.

“While user momentum is likely to persist, the company's higher exposure to more impacted brand advertising and limited visibility over the near term likely caps upside to estimates, and any potential upside from the subscription opportunity is still uncertain,” Ripps wrote in a note.

Raymond James analyst Aaron Kessler said it’s still too early to get much visibility from Twitter’s reported exploration of subscription models.

“We believe shares are fairly valued at ~20x 2021E EBITDA and ~6.5x 2021E revenues given our outlook for mid-teens long-term revenue growth,” Kessler wrote.

Rosenblatt Securities analyst Mark Zgutowicz said investors are now eagerly awaiting the payoff from the company’s rebuilt ad server and ad platform.

“This appears a long ways away as the new MAPS has yet to be resurrected, and when it does, we enter another lengthy DR phase (much broader than mobile app downloads) requiring more than just engineering hours to be a relative ROAS (return on ad spend) success,” Zgutowicz wrote.

User Growth, Engagement Encouraging: BMO Capital Markets analyst Daniel Salmon said Twitter’s direct response advertising is the key to additional upside for the stock.

“We believe strong user growth is keeping investors intrigued, but we believe outperformance remains contingent on execution of the direct response roadmap, which we expect will require patience still,” Salmon wrote.

JMP Securities analyst Ronald Josey said user engagement and growth has gotten a boost from te COVID-19 shutdown and the Black Lives Matter movement, but it's encouraging to see the platform attracting and retaining new users.

“With engagement improving as mDAU growth accelerated for the seventh consecutive quarter, improving advertising trends in June (though still declining), the potential for new ad products given Twitter’s Ad Server is now live, and improved profitability, we are encouraged with Twitter’s progress in Q2 and its outlook going forward,” Josey wrote.

TWTR Ratings And Price Targets

• Canaccord Genuity has a Neutral rating ad $40 target.
• Raymond James has a Market Perform rating.
• Rosenblatt has a Neutral rating and $33 target.
• BMO Capital Markets has a Market Perform rating and $35 target.
• JMP Securities has a Market Perform rating.

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