Twitter Inc (TWTR) Still Has User Growth Momentum to Prove Despite Favorable Q3 Results

Michael Pachter bumps up his price target on TWTR, but remains apprehensive on user/advertiser prospects.

Twitter Inc (NYSE:TWTR) shares were rocketing 18% yesterday after an encouraging third quarter performance the challenged social media giant needed to regain some positive investor sentiment.

Wedbush analyst Michael Pachter notes shares were flying yesterday after a “solid” financial print, but explains that the “nest [still] needs repairs” all the same. Keep in mind, Twitter was able to impress the Street “despite minimal user growth,” which Pachter believes is the key to the company’s future in garnering advertiser attention.

In reaction to the strength of the print, the analyst reiterates a Neutral rating while lifting the price target from $16 to $17.50, which represents a close to 14% decrease from where the shares last closed. (To watch Pachter’s track record, click here)

For the third quarter, Twitter posted $590 million, which outclassed the Street’s $587 million and achieved the tail-end of the implied guide between $500 and $600 million, although slightly underwhelmed Pachter’s high forecast of $611 million. Adjusted EBITDA collected an impressive $207 million for the company, topping the analyst’s projection of $156 million, the Street’s expectations of $160 million, and the guide calling for $130 to $150 million.

Though ad revenue dipped 8%, the analyst finds this was “offset in part by growth in data licensing.” Pachter attributes strong expense management and timing for the adjusted EBITDA outclass, noting certain expenses were pushed out from the third to the fourth quarter.

Monthly active user (MAU) growth hit a sequential four million, with the total MAU number for Twitter meeting the analyst’s expectations of 330 million. Domestically, MAUS rose one million in the third quarter with MAUs across the globe climbing by three million. Non-GAAP EPS surpassed the analyst’s forecast of $0.05, hitting $0.10 for the quarter, likewise trouncing the Street’s $0.06.

On the heels of the quarterly print and fourth quarter outlook, the analyst has tweaked his revenue expectations from $718 million to $690 million, adjusted EBITDA from $206 million to $255 million, and non-GAAP EPS from $0.09 to $0.14. For 2018, the analyst has adjusted his revenue expectations from $2.56 billion to $2.52 billion, adjusted EBITDA from $770 million to $881 million, and non-GAAP EPS from $0.30 to $0.39.

Pachter explains his largely cautious stance, elaborating: “Slow user growth, declining ad revenue, and variability around results remain limiting factors. Until Twitter accelerates user and revenue growth, we expect advertisers to remain reticent to commit ad dollars to its platform and to seek platforms with better targeting, reach, and scale.”

Ultimately, “We see little progress towards attracting new users, which we believe is essential in order to generate advertiser demand going forward. The company is focused on ‘safety’ issues, which we think can go a long way to attracting new users, if promoted properly. However, we believe that Twitter faces an image problem, as it has been slow to act on harassment and other hostile behavior. Once advertisers see improving user growth and metrics, we believe advertising revenue can once again begin to grow,” contends the analyst.

Wall Street is not rooting for the internet stock’s success, earning a weak analyst consensus rating. TipRanks analytics exhibit TWTR as a Sell. Based on 20 analysts polled by TipRanks in the last 3 months, 13 maintain a Hold on Twitter stock while 7 issue a Sell. The 12-month average price target stands at $15.50, marking a nearly 24% downside from where the stock is currently trading.

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