Twitter's Q4 Did Little To Sway These Analysts

Apart from a bottom-line decline, Twitter Inc TWTR beat most other expectations for its fourth-quarter earnings.

Management recorded a 21% increase in global monetizable daily active usage (mDAU) — representing a fourth consecutive quarter of acceleration — and 29% rise in ad engagements. It reported an 11% boost in revenue despite 4% headwinds from its Mobile Application Product and data privacy issues. Ad revenue rose 12% and data licensing 4%.

“Even with data privacy headwind, US advertising +20% y/y (FY19 +21%), driven by user growth, suggesting the company can monetize US DAU upside in real time,” Oppenheimer’s Jason Helfstein wrote in a note. “Performance marketing headwinds in Int'l markets masked steady growth in brand advertising, but were a drag.”

Meanwhile, operating expenses came in slightly below guidance in spite of achievements in infrastructure development.

“It sounds like progress was made in 4Q to rebuild the ad server, which is expected to be completed in 1H20, and the new MAP product is expected to launch sometime this year as well,” Nomura Instinet analyst Mark Kelley wrote. “User growth and engagement was positively impacted by product enhancements, such as the ability to follow a topic (rather than accounts), which is expected to continue.”

See Also: Here's How Much Investing $100 In The 2013 Twitter IPO Would Be Worth Today

Near-Term Forecasts

Twitter projected 20% growth in costs and expenses for 2020, driven by the construction of a new data center and efforts to rebuild its ad infrastructure.

“This is an important investment as we expect this new infrastructure to enable TWTR to develop/test/iterate products at a materially faster pace,” Morgan Stanley analyst Brian Nowak wrote. “As such, in our view, it will be important to monitor TWTR's new ad product tests and announcements throughout 2020 to determine whether they are delivering on this and increasing the reasons for advertisers to join TWTR and scale spend on the platform.”

Execution on this strategy will justify Twitter’s current valuation, according to the analysts. They are particularly monitoring direct-response marketing — a metric Rosenblatt considers key to Twitter’s success. The latter team is not hopeful for its impact.

“While DR is a relatively small mix of TWTR’s heavy brand base and is largely concentrated OUS, it’s critical to LT sustainable growth of its ads business, in our view,” analysts Mark Zgutowicz and Bernie McTernan wrote. “MAPS addresses one objective of DR advertisers, app downloads, however there are several other lower funnel DR objectives it will not, leaving a wide hole in TWTR's performance marketing solutions.”

Mizuho sees catalysts for daily-average-user (DAU) growth in the back half of 2020, which includes the presidential election and Olympics. However, Morgan Stanely doesn't expect material improvements until 2021.

“Some may already be priced in too, because while 2020 has a strong events calendar (Olympics, etc.), TWTR will likely need to successfully innovate/drive faster ad growth in 2021 in order to grow into this valuation,” Nowak wrote.

If Twitter can pull off this ad growth, Wedbush suspects it will capitalize on higher DAUs.

“We think recent safety and security initiatives have improved user confidence in the Twitter product, and expect modest growth to continue for the foreseeable future,” analyst Michael Pachter wrote.

The Ratings

Wedbush’s enthusiasm for Twitter was tempered by uncertainty around execution, user growth and seemingly full valuation. Rosenblatt cited “structural limitations” to Twitter’s ad platform, and Aegis offered similar concerns.

“While the strong U.S. ad growth acceleration was a meaningful positive, and we continue to see areas of potential upside..., we remain concerned that Twitter can sustain high levels of monetization, and that expense growth can moderate,” analyst Victor Anthony wrote.

• Aegis Capital maintained a Hold rating on the stock but raised its target from $33 to $36;
• Instinet maintained a Neutral rating and raised its target from $34 to $37;
• Mizuho maintained an Underperform rating and raised its target from $31 to $35;
• Morgan Stanley maintained an Equal-Weight rating but raised its target from $33 to $34;
• Oppenheimer maintained an Outperform rating and raised its target from $38 too $44;
• Rosenblatt maintained a Neutral rating and raised its target from $29 to $36; and
• Wedbush maintained a Neutral rating but raised its target from $34.50 to $36.50.

“We commend the progress management has made over the last several quarters (particularly after the 3Q print) and would look for clues that the new MAP product is ready for a broader release before we get more positive (we expect 2H20) and at current levels believe shares are priced appropriately,” Kelley wrote.

Mizuho is eyeing alternative metrics: “We would be more constructive on TWTR if the company could drive pricing leverage with a successful DR portfolio."

Twitter's stock traded around $37 per share at time of publication.