The bank also slashed the social media company’s price target from $34 per share to $24 per share. TWTR was down as much as 8% in early trading on the news.
I don’t always agree with Morgan Stanley’s views, and in fact, when it slashed its price target on GoPro (GPRO) a few weeks ago, I publicly slammed the bank for its myopic outlook and idiotic rationale.
But I digress. The point is, sometimes analysts get it dead wrong, and sometimes they’re spot-on. Wednesday’s ruthless note on TWTR stock is spot-on, and makes some salient points that Twitter bulls will have a tough time refuting.
Twitter’s Revenue, Ad-Load Problems
The two strongest points in today’s note related to Twitter’s revenue and so-called ad-load problems.
Morgan Stanley notes that current Wall Street consensus estimates call for TWTR to double its revenue by 2017. That’s ambitious for any company the size of Twitter, but it’s especially difficult in Twitter’s case … when the objective is entirely unrealistic.
It’s no secret that TWTR is having serious difficulties courting new users; last quarter, it grew monthly active users by a pitiful 0.7% from the previous quarter. That’s one-fifth the rate that Facebook (FB) grew its user base in Q2, despite Facebook having more than four times as many users to begin with.
In light of its depressed user growth, TWTR would have to make some incredible strides in monetization for it to have a snowball’s chance in hell at doubling revenue by 2017. Courtesy of Business Insider:
“Morgan Stanley estimates revenue per user would have to grow at a compound annual growth rate of 32% — to $12.73 from $7.53 — just to reach those Street numbers.”
For context, consider that Facebook — arguably the best targeted-advertising platform on the Internet next to Alphabet’s (GOOG, GOOGL) Google — grew average worldwide revenue per user by 23.2% year-over-year in its most recent quarter.
The note goes on to explain that the TWTR ad-load — essentially the density of ads on its website — is 10 times as high as Facebook’s when adjusted for time spent on site. It further estimates that Twitter’s mobile CPM (the cost advertisers pay to reach 1,000 users) is 13% higher than Facebook’s.
Bottom Line on TWTR Stock
With advertisers increasingly going to platforms like YouTube (owned by Google), Instagram (owned by Facebook) and Snapchat, Twitter’s sluggish user growth makes it less compelling by the day from an advertiser’s perspective.
Twitter’s quagmire becomes even more worrisome when you consider that the company isn’t even profitable yet, at least on a GAAP basis. And by non-GAAP estimates it trades at an unjustifiable 46 times forward earnings.
I’m glad Morgan Stanley shed light on how TWTR stock isn’t worth investors’ time, because it’s not. If you own it, sell it before things get worse. And if you’re thinking about buying, give me a shout on Twitter at @divinebizkid and let me know what makes you a believer.
I’ll always listen to reason, but hope … hope has no place in an investor’s psyche.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at email@example.com.
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