Morgan Stanley: The Bull, Bear and Base Case for Twitter After Earnings

Morgan Stanley analysts kept their Equal-Weight rating on Twitter Inc TWTR, slapping a $43 price target on the $42 stock. In the note, Morgan Stanley outlined three potential scenarios: the bull, bear and base cases for Twitter's performance.

But first, Morgan Stanley showed disappointment with Twitter's Q1 earnings results, noting that these poor results when compared against Facebook Inc FB show that it is Facebook that is "the top destination for incremental ad spending." Morgan Stanley also reduced its 2015 core MAU expectations by 12 million – a substantial decline in new additions.

Morgan Stanley's base scenario – with the $43 price target – models this decelerating MAU growth in 2015 and 2016 compared with 2014. By 2020, MAUs are 100 million below the bull case, at 650 million, according to the analysts. The analysts forecasted that ad engagement remains at 1 or 2 percent, while cost per ad grows in the low single digits.

In the bull scenario, Morgan Stanley said the price could reach $66, as Twitter is able to convert logged-out users into monthly active users (MAUs). Additionally, the bull case would mean that Twitter's international growth accelerates at a faster pace, helping the company achieve 745 million MAUs by 2020.

In the bear case, worldwide MAU growth decelerates faster and for longer than the analysts currently expect. Morgan Stanley said that this could lead MAUs to just 515 million in 2020, leading Twitter to have challenges raising cost per ad. The bear scenario would see Twitter's valuation shrink to 19.2 billion and a per share price of $24.

Twitter fell more than 18 percent yesterday as earnings hit the market before the closing bell. The stock is indicated down another 1.8 percent in premarket trading, last at $41.51.