Twitter Inc (TWTR): MAU, Key Engagement Metric, Declines

Morgan Stanley analysts Scott Devitt, Jordan Monahan, Erhan Soyer-Osman and John Egbert rate Twitter Inc (NYSE:TWTR) as Underweight.

Twitter’s fourth quarter earnings

Twitter Inc (NYSE:TWTR)’s 4Q results show signs of slowing user growth and engagement:

1. MAUs grew slower than expected, suggesting that Twitter may be finding it more difficult to capture a more mainstream audience. US MAUs came in at 54m (+3% Q/Q), vs. International MAUs of 187m (+5% Q/Q). We see 2014E US / International MAUs of 64m / 235m representing growth of 19% / 26% Y/Y.
2. Timeline view growth continued to decelerate, with WW timeline views per MAU per day, a key measure of user engagement, decreasing 3% Y/Y and 11% Q/Q. We estimate WW timeline views of 164b (+20% Y/Y) in 1Q, and 708b (+19% Y/Y) for FY2014.
3. Total WW revenue grew to $243m (+116% Y/Y), with ad revenue totaling $220m (+121% Y/Y). We estimate 2014 / 2015 total ad revenue of $1.2b / $1.8b, growing 95% / 51% Y/Y. Twitter Inc (NYSE:TWTR) reported WW ad revenue per 1000 timeline views of $1.49 (+76% Y/Y); we model $1.63 / $1.96 or growth of 63% / 20% for 2014E / 2015E.
4. Adjusted EBITDA grew faster than we expected in 4Q, with gross margin reaching 74.8%, while EBITDA grew 155% Y/Y (18.4% margin). We estimate 2014 / 2015 EBITDA of $181m / $385m, representing a 14.5% and 20.9% margin, respectively.

Estimate changes and valuation

We increase our 2014-2017E ad revenue by 11-17%, adjusted EBITDA margin by 6-7%. We raise our 12-month DCF-driven price target for Twitter Inc (NYSE:TWTR) to $36 (was $33), equivalent to 13X / 62X revenue / EBITDA against 40% / 79% CAGRs (2015-2018E).