This Morgan Stanley Downgrade Has Twitter Shares Falling

• Shares of Twitter Inc TWTR have declined 39.86 percent over the past six months, hitting a low of $24.68 on October 1.
• Morgan Stanley’s Brian Nowak has downgraded the company from Equal-weight to Underweight, while lowering the price target from $36 to $24.
• Nowak believes that there could be 22 percent downside risk to the stock valuation, while the company is expected to see declining engagement and limited user growth, as well as limited advertiser demand.

Analyst Brian Nowak believes that the consensus revenue and EBITDA estimates are too optimistic. To meet these forecasts, Twitter’s revenue per user would need to grow at a CAGR of 32 percent.

Related Link: JMP Stepping To The Sidelines On Twitter, Downgrades

Nowak believes that this is unlikely, given the company’s “already high ad load, falling user engagement, high ad unit pricing, and rising mobile ad competition.”

In addition, Nowak believes that Twitter could be reaching an ad load ceiling, “as continued increases in ads/user has the potential to reduce click-through rates, lower advertiser ROI, and stifle user growth or, perhaps cause MAUs to fall.”

Engagement trends also seem unfavorable, with the average time spent per mobile user has been declining at an accelerating rate.

On the other hand, ad units on Twitter are more expensive, given the platform’s limited reach. “In addition, some of our TWTR agency conversations remain tepid, with marketers flagging TWTR's limited scalability as a factor holding back ad budgets,” the Morgan Stanley report mentioned.

At the same time, competition for advertising dollars as well as users’ time has been on the rise, as competing platforms “with stronger user and/or engagement growth continue to increase their push for ad dollars,” the report added.

Nowak expects the combination of high pricing and increasing competition to adversely affect the company’s earnings power and ad dollar growth, going forward.