Top Analyst Sees Twitter Inc as a Risky Bet Ahead of Tomorrow’s 4Q Print

Canaccord's Michael Graham warns that odds are not in favor of Twitter's user growth; with revenue headwinds circling, there is heavy uncertainty.

With Twitter Inc (NYSE:TWTR) set to deliver its fourth quarter print for the year tomorrow morning, one Wall Street expert is still hesitant to place a bet on the comeback social media giant.

Top analyst Michael Graham at Canaccord notes that after a stronger third quarter showcase from the company, grapevine whispers have risen as to what could be in store for the future- especially with continuous rumors of merger & acquisition buzz.

However, three key red flags stand out to Graham: apprehension for the analyst boils down to a sustained issue of sluggish monthly active user (MAU) growth, lingering revenue headwinds, and a mere “modest pace” for product development.

Therefore, ahead of earnings, the analyst reiterates a Hold rating on TWTR stock with a $21 price target, which implies a close to 19% downside from current levels.

“Twitter’s product has evolved more slowly than peers (Facebook, Instagram, YouTube, Snapchat) and still creates challenges for new users. While DAU growth has been a bright spot, we are not yet convinced that Twitter has embarked on a phase of reliably consistent user growth along with greater relevancy for advertisers,” continues Graham.

Meanwhile, with another important executive setting foot out the Twitter as COO Anthony Noto ditches the company after close to four years, Graham cannot help seeing the writing on the wall for “executive turnover at the top:” “risk.”

Graham writes, “Like Snapchat, we think there’s inherent value in this platform, with a seeming uptick in engagement and relevancy (at least in U.S. news and pop culture) that could make it an asset for a larger player. If user growth can stay on the current gradual ascent, we see potential for revenue to follow next year after the business navigates headwinds from de-emphasized products in 2017.”

With “user growth likely to remain slow” and “revenue headwinds [to] persist, particularly in the U.S.,” the analyst sees more downside than upside potential for the stock.

Worthy of note, total revenue fell 4% year-over-year, with ad revenue dipping 8%, but data revenue surging. These revenue headwinds are putting the company’s growth profile under heat. Also, “Seemingly none of” Twitter’s endeavors to “break into the mass consumer market” have spurred a meaningful jump in MAU or revenue. Yet, the analyst does acknowledge DAU gains have been stepping “in the right direction” at least.

For the fourth quarter, Graham angles for 3.8% year-over-year growth in MAUs, but with no sequential net adds. Meanwhile, considering gains have hovered between around 3% and roughly 6% for two years running, odds are not in favor that of a “notable reaction in the stock.” Moreover, without the excitement of Thursday Night Football and no U.S. presidential election to stir up drama in tweets as Twitter experienced this time the year before, this could lead to a difficult comp, argues Graham.

In a nutshell, “Twitter remains a fairly complex product/user experience,” and Graham is not willing to take the gamble on the platform.

Michael Graham has a very good TipRanks score with a 62% success rate and a high ranking of #125 out of 4,736 analysts. Graham yields 15.2% in his yearly returns. However, when recommending TWTR, Graham forfeits 33.3% in average profits on the stock.

TipRanks signals caution from the majority of analysts assessing Twitter’s comeback opportunity. Out of 21 analysts polled in the last 3 months, 6 rate a Buy on Twitter stock, 12 maintain a Hold, while 3 issue a Sell on the stock. The 12-month average price target of $23.12 points to 8% in downside potential from where the stock is currently trading.

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