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Twitter’s purge leaves user metrics healthier, but weighs on growth and outlook, says Wedbush

Published: 19:15 30 Jul 2018 BST

Twitter
'Current trading levels suggest that shares of Twitter are fully valued at present,' Wedbush analysts wrote

Analysts at Wedbush maintained a Neutral rating on Twitter Inc. (NYSE:TWTR) but increased their price target to US$37 from US$29 saying the San Francisco-based social media network’s purge in the second quarter left user metrics “healthier.”

Shares in Twitter were up 0.41% to US$34.26 in premarket trade.

Meanwhile, analysts at Oppenheimer maintained a Perform rating and US$34.12 on Twitter stock.

After reporting a soft second quarter, Twitter spooked investors even more by disclosing that monthly users dropped by one million, while warning that usage would further decline as the social media platform escalated its fight against fake accounts and mean rhetoric.

Twitter said that it had 335 million monthly users around the world in the second quarter, down from 336 million users in the quarter prior.

READ: Twitter tumbles after 2Q profit falls short of estimates, sharp decline in users

“Total Monthly Average Users (MAU) in 2Q were 335 million, compared with our estimate of 337 million, 336 million last quarter, and 326 million last year,” Wedbush analysts Michael Pachter, Nick McKay and Mathew Breda wrote in a note to clients released Friday.  

The factors impacting second quarter user growth are expected to stay relevant in the third quarter, but the analysts drew comfort from expected minimal revenue impact from the decline.

Twitter appears to have its revenue growth back on track overall, and once it laps the hiccup from purging accounts, we expect the company to emerge in better overall health,” wrote the Wedbush analysts.

“We are maintaining our Neutral rating while adjusting our 12-month price target to US$37 from US$29 previously. Our price target is based upon a forward adjusted EBITDA multiple of 20x, in-line with Twitter’s Internet peers, and reflects both the company’s growth prospects and advertising industry fundamentals,” they added.

The analysts, however, said Twitter’s platform required changes to support long-term user growth and revenue expansion.

“Current trading levels suggest that shares of Twitter are fully valued at present,” wrote the analysts.

Bull case

In a best-case outcome, which is far from a given, the Wedbush analysts said improvements to the user experience and expansion of video content could drive user growth and higher engagement.

Base case

In making their base case, the analysts said recent steps to control costs and reduce stock-based compensation are “positive,” but until Twitter “reaccelerates its user and revenue growth,” shares are “likely to remain range-bound.”

The analysts said upcoming catalysts hinged on “updates to high-level guidance; quarterly results; exclusive content agreements,” partnership announcements and new commitments from large advertisers.

Investor sentiment

“Generally improving following a strong finish to 2017, but MAU and revenue growth remain areas of concern,” wrote the Wedbush analysts.

Oppenheimer's investment thesis

Meanwhile, analysts at Oppenheimer said Twitter was “generally improving” following a strong finish to 2017, but monthly active users and revenue growth remained “areas of concern.”

“Year-on-year change in CPE (pricing) worsened quarter-on-quarter, suggesting the company is struggling to generate additional auction demand for increased inventory of video ads,” wrote the Oppenheimer analysts in a research note released Monday.

“While Twitter ads are priced below Facebook/Instagram, click-through rates trail these platforms,” added the analysts.

Facebook Inc. (NASDAQ:FB) and Google parent Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL) reign as the dominant forces in online advertising, with the two companies expected to account for more than half of all digital ad spending in 2018.

The analysts said that new features had improved Twitter’s user engagement, but they were concerned that the main driver of ad engagement “is lower priced ads (i.e., improving ROI), which needs to stabilize" in order to drive growth in 2019.

-- (Update with Oppenheimer's investment thesis) -- 

Contact Uttara Choudhury at uttara@proactiveinvestors.com
Follow her on Twitter: @UttaraProactive

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