Challenges To The Twitter Inc. Investment Thesis Persist

  • Twitter's audience metrics are weakening according to third-party reports.
  • The stock hasn't had enough incremental positive news to drive valuations higher.
  • The company is now trading at lower valuations, and I anticipate this to persist going forward.

Some more alarming news came out with regards to Twitter (NYSE:TWTR), which has me rethinking my position on the company. While efforts by the management team to alleviate the pain points among investors have been noble, the stock primarily trades on the basis of audience metrics. In other words, unless Twitter is able to reverse the decline in MAUs (Monthly Active Users), the company will continue to decline in value as analysts will have to revise estimates on ad-sales given the reduction in average impressions.

In a report released by Bank of America Merrill Lynch:

Twitter mobile users were down 1.6mn m/m to 79mn (up 11% y/y, 3% lift from comScore changes), while mobile minutes decreased 7% m/m and total minutes were down 6% y/y. We have limited confidence in the validity of the comScore data for Twitter given the YTD variability.

The 6% decline in February followed January’s 14% y/y growth in minutes across desktop/mobile. Initially, I thought Twitter would reach an inflection point on engagement, but the added lumpiness points to a year that could be similar to 2015. This makes it difficult to get really aggressive on the name, because if audience usage metrics were to decline over the course of 2016 (similar to 2015), the company may not reach full year consensus estimates on revenue of $2.96 billion. Therefore, investors should be more wary of audience metrics, because there’s the possibility that the three-month average of MAUs will decline on a sequential basis given preliminary data points. All of this points to further weakening of investor sentiment coming out of the upcoming earnings report in the month of April.

Recent News Does Little To Lift The Stock

In recent news, Twitter has formed a partnership with Acxiom to conduct research on offline sales impact for Twitter ads. I don’t know if this partnership will necessarily yield near term results, but given Acxiom’s incredible data base in conjunction with Twitter’s rich audience demographics, the two firms may be able to arrive at more accurate deductions on digital advertising ROI. Twitter hasn't been able to generate a whole lot of news with regards to ad tech, partnerships and M&A recently, so incremental positives are a welcome.

However, until Twitter reintroduces the discussion of different tweet lengths and functionality improvements, there’s not a whole lot to rally around. Not only is the preliminary data bad, but the amount of news has really declined, which implies that the management team is starting to run out of ideas to optimize either the back-end ad tech or the front-end product experience.

While Twitter Moments has proven to be a positive, the company has yet to show compelling audience metrics following the launch. Expectations among analysts were high following the hyped release of various features/products over the course of 2015, but growth trends have shown further deceleration and at perhaps a faster pace than what investors feel comfortable with.


3-29-16 TWTR

Source: Rawcharts

Twitter's valuation was a little stretched coming out of 2014 and has really compressed over the past year. At this point bargain hunters could step in, but given the lack of compelling growth catalysts it’s hard to rationalize the growth and value dynamics when compared to internet peers. Attaching a value assumption on Twitter also becomes difficult, because of the lumpiness in audience data makes it difficult to project sales for FY’16.

Analysts like Mark Mahaney of RBC Capital Markets are anticipating that Twitter’s share of advertising dollars will be under jeopardy due to competition:

Concentration of advertising revenue market share – It’s kind of hard not to see the accelerating revenue growth of GOOGL and FB and the Ad Revenue challenges of TWTR, LNKD, and YHOO as linked. At a broad level, we see the GOOGL and FB advertising platforms as becoming more powerful and expansive over time, providing marketers with compelling ways to reach very large and very targeted audiences, either based on intentions or demographic profiles. We believe this has over time been reducing the advertiser value proposition of competing ad platforms like YHOO, LNKD, and TWTR. And that showed up in the disappointing December quarter ad revenue results of these three companies.

Given these factors, it’s really hard to find any incremental positives on the name. I mean, things could get a lot worse. Growth assumptions by other analysts could be too aggressive, especially on the buy side. On the other hand, if Twitter is able to survive the next couple of quarters by meeting consensus expectations while also demonstrating expense leverage, and continued execution on the strategic roadmap, I could imagine the stock moving higher. But, on the other hand, if audience metrics continue to slide, the management is unable to meet expectations, and sentiment worsens, I could easily imagine the stock dropping into the low-teens.

Final thoughts

I’m currently neutral on the stock, and I’m initiating a price target of $18.74.

However, the lack of durable earnings/sales metrics may imply further revisions to my own estimates on sales/earnings down the road. The lack of visibility in conjunction with weakening audience metrics explains why the stock trades at a discount to 2014/2015 valuations. As such, investors may have limited upside from here despite the compelling PEG, EV/Sales, Adjusted P/E metrics.

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