Big brands didn’t spend as much as expected on Twitter Inc (TWTR) ads last quarter. That’s what has everyone worried about Twitter stock after it reported its first-quarter earnings.
Shares of TWTR stock fell more than 15% after the company reported revenue that fell short of expectations. The company brought in just $595 million in revenue, while the Street was expecting $608 million.
TWTR wasn’t afraid to own up to its shortfall. “Revenue came in at the low end of our guidance range because brand marketers did not increase spend as quickly as expected in the first quarter,” management wrote in its letter to shareholders. The question for Twitter stock investors is, will brand advertising bounce back like management believes it will?
Twitter Stock Depends on Big Brands
Direct ad sales to brand advertisers still account for more than half of TWTR’s ad revenue. But Twitter CFO Anthony Noto has mentioned that the company’s penetration with brand advertisers is already very high. The focus is now on winning a larger share of those company’s ad budgets.
Twitter’s upfront deals with ad agencies and large businesses actually increased 40% year over year, according to COO Adam Bain. But many brands may be holding back advertising for the Olympics and the European Champions League.
Still, that 40% increase in upfronts isn’t too far ahead of TWTR’s overall advertising revenue increase of 37%. That indicates that the impact from revenue held back for those big sporting events or the U.S. presidential election later this year — while non-negligible — won’t be nearly as large as management is trying to make it sound.
That’s indicative in management’s Q2 outlook for Twitter stock. It currently expects revenue in the range of $590 million to $610 million, indicating a potential sequential decline in revenue, and a range of -1% to 2.5% in sequential growth. As one analyst pointed out on the company’s earnings call, mature media companies growing at about 3% to 5% annually typically see an increase in advertising revenue from Q1 to Q2.
Why Isn’t TWTR Stock Attracting More Branded Ad Dollars?
There are a couple of factors impacting Twitter’s ability to grab a larger share of branded ad budgets. One is internal and the other is external.
Internally, Twitter mentions that many are experimenting more with video ads. Indeed, video spend from branded channels increased sequentially from Q4 despite the usual decline in ad spend. However, those video ads have come at the expense of other Promoted Tweets, not from other channels like TV or competing digital platforms.
In the long run, that actually benefits Twitter, as video ads require less ad inventory and users enjoy video ads more. In the short run, however, it means slower-than-expected growth in ad revenue because brands can achieve similar results with less spend.
The second factor to consider is the rise of new competition in social advertising. Both Facebook Inc‘s (FB) Instagram and Snapchat have expanded their advertising products and reach similar — if not more attractive — markets to Twitter. With the expansion of the competition, brands are stretching their budgets across more platforms, leaving less room for Twitter.
Ultimately, Twitter stock investors should be more concerned about the latter trend. ROI on Twitter’s video ads will stabilize as the market adjusts, but the competition is only continuing to grow. Instagram has already passed Twitter in active users and active advertisers. Snapchat sees over 8 billion video views on its platform every day, up more than five times from where it was a year ago.
Twitter can no longer rely on increasing the number of brand advertisers to grow its revenue, and the competition for ad budgets is more fierce than ever.
While management says brand revenue should bounce back in the second half of the year with the Olympics and election, it’s clear there’s more at work than advertisers simply holding back spending for those events.
As of this writing, Adam Levy held no positions in any of the companies mentioned.