To say that RBC Capital’s analyst Mark Mahaney has a little egg on his face today would be a sizeable understatement. His luck couldn’t have been any worse. He downgraded Twitter Inc (NYSE:TWTR) on Thursday afternoon and subsequently lowered the firm’s price target on Twitter stock to 25% less than that day’s closing price. On Friday morning, TWTR shares jumped 20% on the heels of rekindled buyout rumors.
Even without the suggestion that a buyout offer was imminent, however, the analyst’s revised opinion looks poorly timed at best, and ill-advised at worst. That is to say, there’s a not-so-obscured reason a suitor would be interested in Twitter.
And it’s more or less the same reason an investor would be willing to give Twitter stock at least a little benefit of the doubt.
RBC Downgrades Twitter Stock
Just in case you’re wondering: Yes, I’m the same guy who’s been far more apt to be critical of Twitter than bullish on it, for reasons explained here, here and a few other places. Most consumers have simply struggled to understand what Twitter is and why they would want to use it on a regular basis.
That has showed up in the form of anemic user growth, and relatively disappointing revenue growth. And, that’s why RBC Capital analyst Mark Mahaney cut the firm’s call on Twitter stock from “Sector perform” to “Underperform” on Thursday afternoon, and that’s why he lowered the firm’s price target on TWTR stock from $17 to $14.
“This change is based on our belief that Twitter’s value proposition to advertisers could be waning, based on our recent advertiser survey data. We note that we still believe Twitter is a unique asset with a strong value proposition to core users.”
Specifically, Mahaney found that 30% of the advertisers RBC queried did not have plans to spend any money on Twitter as a promotional vehicle, up from 25% earlier in the year.
It all seems very reasonable on the surface. But, of all the times to downgrade TWTR, Sept. 22 may have been the least opportune time to jump ship.
Two — well, three now — big reasons come to mind.
He Should Have Suspected
Just for a little perspective, the last time RBC updated its opinion of Twitter was on Oct. 28, 2014, lowering its call on TWTR stock from “Outperform” to a “Sector perform.” The downgrade was appropriate in the sense that Twitter stock didn’t do as well after the downgrade as it did before the downgrade. But inasmuch as TWTR shares still are only worth half of what they were on Oct. 28, 2014, that call still was overly optimistic.
In the sense that Mahaney was late to the bearish party, it’s not unfair to ask: Might he be late to the bullish party? (And that’s even factoring out today’s 20% surge on rumors of a buyout.)
It’s undeniable that Twitter has problems. But, quite literally, the Twitter of today isn’t the same Twitter it was a month ago. Just within the past couple of weeks it has become a television venue, broadcasting its second NFL game online just last night, and at the end of August it unveiled a revenue-sharing plan that puts it on par with YouTube.
The second reason Mahaney’s call may have been ill-timed: Just a few days ago, the microblogging site eased up a bit on the 140-character cap placed on tweets. Now links, attachments and other Twitter users’ names used in a post aren’t counted. It remains to be seen if a little more room will make the platform more like that of Facebook Inc (NASDAQ:FB), where members can rant at-will, for as long as they like. It probably won’t. But it’s a start.
Slightly longer tweets and video content might not end the company’s troubles. But after failing to downgrade the stock after nearly two years of deterioration, it’s fair to ask: Why downgrade TWTR stock in the shadow of what are two initiatives that might finally make some sort of positive impact? What’s left to lose?
In the meantime, of course, Twitter has been named as a buyout target.
While it’s a rumor that has been floated before and never went anywhere, it has never not been a credible rumor. If nothing else, Twitter owns more than 300 million names of active users that could be monetized in a myriad of ways to a would-be buyer … ways that aren’t being utilized now.
In other words, if for no other reason than knowing an offer was always a distinct possibility, Mahaney may have wanted to keep his powder dry.
First and foremost, take the acquisition rumors with a grain of salt. There’s probably some sort of factual basis to them, but a high-profile name like Twitter makes it a manipulation target; too many traders want to believe any good news they may hear about the company.
On the flip side, it’s rare for a name like Twitter to be the focal point of as many buyout rumors as it has been without it panning out sooner or later.
Either way, without the benefit of the offer as well as without the burden of RBC Capital’s downgrade, Twitter stock makes for a compelling speculation at this point. The digital video advertising market in the U.S. alone is projected to be worth nearly $15 billion by 2019, and Twitter’s partnerships with the NFL and other professional sports leagues give it a potent weapon to grab a big piece of that pie.
Meanwhile, while the tweets still can’t become long-winded diatribes, it’s clear that CEO Jack Dorsey is at least considering changes of things that were previously immutable before.
Twitter stock may still not be a name suitable for grandma’s retirement portfolio, but the company hasmore going for it here than it has in a while.
If you were going to sell TWTR (or downgrade it to a “Sell”), the time to sell it was a couple years ago.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.