Watch Out, Twitter Inc Investors: Analyst Warns of “Underwhelming” User Growth Ahead of Q4 Print

Wedbush's Michael Pachter sees a lot of risks swirling around Twitter- from sluggish user gains, a downturn in ad revenue, and execution turnover.

As Twitter Inc (NYSE:TWTR) gets set for a fourth quarter earnings delivery this Thursday morning, one analyst on the Street is out advocating to steer clear of the social media platform until the “clouds” start to “clear.”

Wedbush analyst Michael Pachter notes he may angle for “modest” upside for the fourth quarter, but he likewise predicts a “modest” revenue year-over-year dip. This quarter’s revenue’s decline is mostly a result of TellApart, which Pachter deems a headwind circling a whopping $40 million. Moreover, comps are challenging in live video considering “lapping” Thursday Night Football coupled with the U.S. presidential election- standing at an around $15 million headwind.

The fourth quarter does not look too bright in terms of user gains and cost per engagement trends, leaving Pacther with expectations for an “underwhelming” show ahead. Additionally, with the game of ‘musical chairs’ of leaders that keep setting foot out the Twitter door, Pachter asserts: “The departure of COO Anthony Noto highlights continued execution risk and a history of elevated executive turnover at the company.”

As such, in a tentative earnings preview, the analyst reiterates a Neutral rating on TWTR stock with a $17.50 price target, which implies a 30% downside from current levels. (To watch Pachter’s track record, click here)

For the fourth quarter, the analyst predicts Twitter will realize $690 million in revenue, $255 million in adjusted EBITDA, and $0.14 in non-GAAP EPS, against the Street’s forecasts of $686 million, $241 million, and $0.14. The TWTR team’s revenue guide calls for between $611 and $686 million in revenue and between $220 and $240 million in adjusted EBITDA. Another point of concern for Pachter: the analyst bets Twitter is primed for its tenth consecutive quarter of cost per engagement (CPE) growth fallbacks in year-over-year growth. The culprit? A “higher” video ad mix for the social media player.

Regarding less-than-impressive user growth, the analyst estimates Twitter will yield 2.0 million in quarter-over-quarter total monthly active user (MAU) growth, with domestic gains falling flat at 69 million. Internationally, Pacther believes Twitter will fare better, rising to 263 million.

Pacther continues, “Despite continued growth in data licensing and other revenue (estimated to grow approximately 25% year-over-year), the benefit of ad seasonality, and a slew of updates to Twitter’s product and safety features, the headwinds listed above, along with continued CPE declines and underwhelming user growth, will likely constrain overall revenue growth in Q4. Sustained cost control should allow Twitter to deliver Q4 adjusted EBITDA above the guided range, however, with revenue being the key variable.”

Factoring in ad seasonality, Pachter would not be surprised to see the outlook from Twitter brace for a sequential decrease in revenue and EBTIDA margin for the first quarter of 2018.

For the first quarter of 2018, the analyst wagers Twitter can hit $575 million in revenue and $199 in adjusted EBITDA, which would point to a 35% EBITDA margin. Though Pachter is cautious, his estimates are higher than consensus of $573 million for revenue and $191 million for adjusted EBITDA, which calls for a margin of 33%. Compare to this time last year, where Twitter achieved $548 million in revenue for the first quarter of 2017 along with $170 million in adjusted EBITDA- and a margin of 31%. The analyst wagers Twitter will guide expecting $600 to $700 million in revenue and a 30% to 35% EBITDA margin.

In a nutshell, “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,” Pachter surmises.

TipRanks highlights caution as investor sentiment circulates through the Street on Twitter’s recovery. Out of 19 analysts polled by TipRanks in the last 3 months, 6 are bullish on Twitter stock, 11 remain sidelined, while 2 are bearish on the stock. With a loss potential of nearly 10%, the stock’s consensus target price stands at $23.43.

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