Here's Why CLSA Is Negative On Twitter

Shares of Twitter have lost nearly 30 percent over the past year while its shares of

gained more than 30 percent over the time period. Despite the large underperformance, analysts at CLSA initiated coverage of Twitter with an Underperform rating and $26 price target. According to the analysts, Twitter is in the middle of a "operational transition" and he would be more constructive on the stock if the company transitions itself to an "always on media platform" that is able to produce recurring revenue streams, especially as a "scalable second screen to TV advertising." The analysts continued that Twitter's business model may be heading in the wrong direction. First, the analysts noted that Twitter is introducing new products and integrating its functions to improve its user base. The analyst suggested that in order for Twitter to be an "always on" platform from an advertiser's point of view, users need to be able to revisit the platform consistently. While providing content curation through Moments is a "starting point," the company "has more room to go." Second, the majority of Twitter's advertising revenues come from direct sales to large brands. The analysts acknowledged that while this gives the company more control, it may beneficial for the company to improve the "stability" of its ads API which would allow agency partners to expand its customer base and "increase the velocity" for advertisers to achieve an appropriate ROI. Finally, the analyst noted that advertising on Twitter is "still skewed towards tentpole events, which are sporadic." Although the company has improved its performance for DR advertisers over the past 15 months, it is nevertheless "meaningfully lagging" behind Facebook. Bottom line, Twitter's stock is trading at 13x 17CL EV/Ebitda – compared to Facebook's 14x multiple. Given a "similar growth profile" but with "less upside potential," Twitter's stock should not be trading at a premium to Facebook who is a "best of class" within the internet advertising space.