Twitter Inc (TWTR) Downgraded To Underperform

Twitter Inc (TWTR) Downgraded To Underperform
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Sterne Agee analyst Arvind Bhatia downgrades Twitter Inc (NYSE:TWTR) to Underperform and raises estimates after 4Q13 mixed results as user growth slows

We are lowering our rating on Twitter Inc (NYSE:TWTR) from Neutral to Underperform because of 1) deceleration in user growth; 2) decline in user engagement and; 3) the stock’s significant premium multiple to its high-growth peers. We are establishing a target price of $43 (15x 2015E revenue), still a slight premium to high growth social media stocks such as Facebook Inc (NASDAQ:FB) (FB-$62.19-Buy) and LinkedIn Corp (NYSE:LNKD) (LNKD- $214.36-Neutral), trading at 10x and 8x 2015E revenues, respectively.

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Twitter 4Q was mixed; user metrics decelerated; monetization was strong

4Q experienced deceleration in user growth and a decline in user engagement (sequentially). We believe shares of Twitter Inc (NYSE:TWTR) have commanded a significant premium to its high-growth peers due to its higher growth rates. 4Q results are likely to raise questions on how mainstream the Twitter Inc (NYSE:TWTR) platform can be in the long-term. Until user growth and engagement returns, we think the stock could be for sale, especially given its recent run up. On the other hand, monetization, driven by strong ad engagement, outperformed even the most bullish expectations and proves the platform’s effectiveness for marketers.

During 4Q, Reach (user base growth) and Engagement (timeline views) fell shy of expectations but Monetization (revenue) and profitability (adjusted EBITDA) were stronger than expected in both reportable segments—advertising and data licensing. Q/Q, the U.S. user base grew slightly (54M versus 53M in 3Q) and timeline views (worldwide) actually declined. This is sure to raise concerns. 1Q and FY14 revenue and EBITDA guidance was ahead of expectations.

Twitter Inc (NYSE:TWTR)  reported revenue / adjusted EBITDA of $243M / $44.7M versus consensus of $218M / $24.7M and SAL estimate of $195M / $25.4M. Advertising revenue of $220M compared to StreetAccount consensus of $201M and SAL estimate of $179M. Data Licensing revenue of $23M compared to consensus of $15M and SAL estimate of $16M.

Estimate Changes

We are raising our FY14/FY15 revenue to $1.259B/$1.932B from $985M/$1.4B, respectively. We are raising our FY14/FY15 adjusted EBITDA estimates to $220M/$376M from $135M/$271M.

Risks to Underperform Rating

If Twitter Inc (NYSE:TWTR) user growth and engagement trends reverse quicker than expected, the stock will likely react favorably. Additionally, if monetization continues to improve at a faster pace than we have modeled, the stock could perform well.

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