For Twitter, Anything Less Than High-Single-Digit Q1 Daily Active User Growth Will Be A Disappointment

User Statistics

The firm noted the management's statement that DAU growth has accelerated for four straight quarters to 11 percent in the fourth quarter. According to the firm, DAU growth less than high single digits would be disappointing. However, to keep optimism alive, double-digit growth may be required, the firm said.

The firm feels the turnaround in engagement might be difficult to sustain, given the fading of the election surprise and winding down of the NFL season.

Going by periodic disclosures, the firm estimates DAUs of 146 million for the first quarter, with 31 million in the United States.

Q1 Expectations

Analyst Rob Sanderson said the consensus revenue estimate of $517 million for the first quarter is aggressive when weighed against the midpoint of the guidance range of $494 million.

The analyst explained that the high-end of the guidance assumes a bounce back to trends of the first few weeks of January. The mid-point assumes trends from mid-January to February 9 report 2 would prevail, while the low-end reflects scenario where certain direct-response products were de-emphasized.

Given that no announcement was made on de-emphasized products, the analyst feels revenues are not likely to be at the low end. Since the selling environment has not improved through the quarter, the analyst believes the print is unlikely to be better than the midpoint.

Competitive Dynamics

The firm is of the view that Twitter has been losing engagement of influencers to Facebook Inc FB's Instagram in key categories like sports, music and entertainment for some time.

The Twitter management's comment that ad bookings saw a sudden change in mid-January due to an aggressive competitor and Snapchat's parent Snap Inc SNAP IPOing this quarter prompted the firm to state that competition for ad dollars appears to be escalating. Benefits, if any, from Alphabet Inc GOOG GOOGL YouTube ad boycott, could prove short lived, the firm said.

Concluding, MKM Partners said, "We think that a disappointing quarter is widely expected. Sentiment is very bad, TWTR was the worst performing of 35 stocks we track last quarter (down 22 percent since the last report vs. NASDAQ up 4 percent) and short interest has increased by 55 percent since last quarter (now 5.3-days to cover)."

"We think that a sustainable turn in engagement is an extremely difficult task and worth monitoring, but we don't think worth investing in at this point."

MKM Partners maintained its Neutral rating on the shares of Twitter, while its fair value estimate for the shares is $16.

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