BMO Drastically Slashes Twitter Targets, But Still Sees 20% Upside

• Shares of Twitter Inc TWTR have plummeted 69 percent in the last one year and are trading near their 52-week low of $14.31.
• BMO Capital Markets’ Daniel Salmon maintained a Market Perform rating on the company, while reducing the price target from $32 to $18.
• Salmon recommends remaining on sidelines until Twitter’s new initiatives start yielding results, although the stock the potential for 20 percent upside.

Twitter reported robust 4Q results with both revenues and Non-GAAP EPS ahead of expectations, at $710.5 million and $0.16, respectively. The company’s total monthly active users or MAUs, excluding SMS fast followers, at 306 million, however, fell short of expectations.

The company has guided to 1Q16 revenues and EBITDA margin of $595-610 million and 25-27 percent, respectively.

Analyst Daniel Salmon believes that as Twitter realigns under a new CEO, its initiatives to improve user-experience make its platform less confusing and fix “broken windows,” will finally be implemented.

The analyst expects the company’s new CMO to boost marketing efforts and complete the global roll out of Twitter’s new self-serve ad platform.

“Twitter is also now generating minimal FCF (Cash from Opex less Capex) and expects it to continue to ramp,” the BMO Capital Markets report mentioned.

Although Twitter’s user base and its growth remains a key challenge, significant opportunities to attract direct response advertising dollars through ad formats exist, Salmon stated.

The analyst recommends remaining on the sidelines until the company’s “new initiatives like Moments and the increased marketing push bear fruit, as well as the continued impact of the search partnership with Google.”

The annual EPS estimate for 2016 has been raised from $0.46 to $0.56, while that for 2017 has been reduced from $1.08 to $0.95.