The Street loses faith in Twitter

Twitter’s the ultimate “belief” story – you either think it will be one of the most import and influential media platforms on earth or you don’t.

If you are a believer, then you accept the lumpiness inherent in a fledgling ad model that hasn’t yet been proven and the nonstop impossible comparisons to the honor student in the family, Facebook. If you are not a believer, then there’s really nothing to talk about. The company is obscenely expensive given its relatively meager financials and the wobbly appearance of its management and monetization strategy.

Analysts weighed in on Twitter’s messy, awful Q1 earnings report this morning. Even the biggest bulls are dejected and lowering price targets. Costolo and Co certainly aren’t making it easy for the faithful.

First, here’s Bob Peck from SunTrust, who cannily downgraded the stock the day before the miss:

Peck’s Points.1) Twitter reported a difficult quarter missing on core Ad revenues and lowering guidance for the full year which we believe will likely make investors put Twitter back in the “prove it” category. 2) Headwinds Twitter is facing are significant (both on users and products) and potentially multi-quarter in nature and investors will need to see that the company can overcome them. The report touched on several of the issues we discussed in our downgrade note.We are still long-term believers in the opportunity in front of Twitter, but believe the short-term headwinds will weigh on results and investor sentiment and increase the focus on execution. We maintain our Neutral rating with a $45 target (reduced from $50) based on35x EV/EBITDA and 9x EV/Revs on our updated 2016 estimates.

Here’s Mark May at Citi, who carries a Neutral rating and a 44 target:

Unlike Q4 when user growth disappointed but advertiser demand and monetization over-delivered, in Q1 user growth improved but advertiser demand and monetization disappointed – and, as a result, Twitter missed its revenue guidance. Moreover, commentary about Q2 suggests continued near-term headwinds and limited visibility to address the factors impacting current results. While mgmt. is actively pursuing initiatives to improve user growth, the effectiveness of its ad products, and overall monetization, we continue to believe that many of the bull case assumptions are priced in even at after-market levels. We need to gain more confidence in these user and monetization growth initiatives before getting constructive.

Stifel hates the stock and reiterated its Sell rating while slashing the target from 38 to 36…

Twitter missed consensus revenue expectations by roughly 5% and lowered its full-year revenue outlook by 5% and adj. EBITDA guidance by 7%. Monthly active user additions were in-line with expectations largely shaped by positive commentary during 4Q earnings. However, 2Q:15 MAUs are off to a “slow start” and the inclusion of SMS-only users in MAU disclosures going forward could mask Twitter’s true organic user growth. Twitter’s direct response sales capabilities are expected to benefit from the announced acquisition of TellApart and partnership with Google’s DoubleClick platform but it’s unclear to what degree these initiatives can help Twitter mitigate the ad business deceleration implied by management’s updated guidance. We lower our price target to $36 and maintain our Sell rating.

… but Pacific Crest is keeping the faith. They acknowledge the revenue / user guidance “change-up pitch” but see the future as too bright, even as their target comes down 11 bucks to 52:

Too Many Catalysts to Capitulate

Whether the issue is growing pains or poor execution, the story will likely remain choppy. A big part of our bullish thesis was around Twitter continuing to drive near-term upside with new advertising products, especially app install ads. Clearly, these have started slower, and user growth continues to be a challenge. However, we think revenue can reaccelerate in 2H, and MAUs continue the slow chug higher with two new Google deals, video (feed, Periscope and Vine) and a fuller suite for direct-response advertisers (app installs, retargeting, network).

I own some stock and bought the aftermarket plunge last night. My best guess is the risk is lower rather than higher in the short term barring any extraordinary event. The stock probably spends the next 90 days until its next report in the penalty box, why would any institutional investor step up for the name now? And that fantastic stair-step pattern it spent the last five months building has been ruined in 3 seconds, which certainly keeps the momentum crowd away as well.

 

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