Is Twitter The Next Yahoo?

Twitter Inc TWTR issued its 3Q guidance, with revenue growth set to decelerate 4 percent year-on-year and begin to decline in 4Q16.

Morgan Stanley’s Brian Nowak maintains an Underweight rating on the company, while lowering the price target to $13.25.

Disappointing Guidance

“TWTR's 2Q:16 results and 3Q:16 guidance highlight our concerns around TWTR's platform monetization limits,” Nowak mentioned, given that the midpoint of 3Q:16 revenue guidance was meaningfully below the estimate and the consensus.

The analyst expressed concern regarding the slowdown in ad revenue growth implied by the 3Q:16 guidance, despite inorganic benefits from the Rio Olympics, NFL streaming and political ad spending.

Related Link: Victor Anthony Downgrades Twitter, Sees Limited Visibility

Twitter attributed the disappointing guidance to “competition for social budgets and above average premium ad unit pricing,” although Nowak pointed out that the company’s ads continued to be at a premium price per engagement, as compared to more scaled social competitors.

Nowak also believes the company has “reached a near ceiling on its ability to continue to increase its timeline ad load in the US market...all of which we see leading to materially slower growth ahead.”

Going The Yahoo Way?

For perspective, the analyst noted that Yahoo! Inc. YHOO's display revenue started to decline in 4Q:11 and has struggled since then to grow consistently.

If the pace of Twitter’s deterioration continues, with ad revenue continuing to decline year-on-year into 2017, it would imply that an acquirer would need to pay 5X the 2017 Morgan Stanley bear case non-GAAP EBITDA for Twitter.

This is roughly comparable to the price Verizon Communications Inc. VZ recently paid for Yahoo.

At time of writing, Twitter was down 11.11 percent in Wednesday's pre-market session, seen trading at $16.40.

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