JPMorgan Downgrades Twitter, But Still Bullish On Its Use Case

Twitter Inc TWTR reported mixed 1Q results, and announced disappointing 2Q guidance. JPMorgan’s Doug Anmuth downgraded the rating for the company from Overweight to Neutral, while reducing the price target from $26 to $18. The analyst commented that Twitter’s product changes had been slower and less impactful than expected, while the company faced increased competition.

Results And Guidance

Twitter reported its 1Q revenue at $595M, representing 36 percent y/y growth, but short of the consensus and JPMorgan estimates of $608M. Revenue weakness was on account of lower ad revenues, which came in at $531M, up 37 percent y/y, and below the estimate of $538M and consensus expectation of $540M.

Related Link: Goldman Sachs Keeps Buy Rating On Twitter, Sets $22 Price Target

Twitter was able to beat EBITDA expectations on the back of softer R&D spend, which is expected to rise in 2Q, analyst Doug Anmuth mentioned.

Management guided to 2Q revenue of $590M-$610M, significantly below the JPMorgan estimate of $673M and consensus expectation of $678M. EBITDA guidance is disappointing, and also implies a 25 percent margin at the midpoint, which is also below the estimate, Anmuth said.

Continued User And Advertising Challenges

The analyst mentioned that the earlier bull case was partly based on the view that Twitter’s “real-time platform was differentiated & that product improvements would drive increased engagement & monetization over time.”

Although there is still optimism regarding Twitter’s use case, the company has been slow to implement product changes, which have also been less impactful than we expected. Anmuth added that Twitter now faces increased competition from FB’s core Newsfeed, Instagram, & Messenger, as well as from Snapchat. He wrote, “Importantly, we believe the low growth (no growth in the US) in MAUs is weighing more on TWTR’s ad platform.”

US MAUs remained flat for the 4th consecutive quarter, while international MAUs rose merely 4 percent y/y. Moreover, FXN ad revenue growth has decelerated sharply from 78 percent in 1Q15 to 39 percent in 1Q16, and could be in the teens in 2016.
While brand advertiser demand was soft in 1Q, Twitter continues to find it tough to gain a larger share of advertiser budgets, even with solid traction in auto-play video, the JPMorgan report noted.

The revenue and EBITDA estimates have been reduced by 5-6 percent for 2016 and by 13-14 percent for 2017. The EPS estimates for 2016 and 2017 have been reduced from $0.64 to $0.54 and from $0.99 to $0.73, respectively.