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Stock Analyst Update

Twitter Q2 Earnings Disappoint as Macro, Musk Issues Slow Ad Spending

Fair value estimate on Twitter’s stock cut to $44 on pullback in advertising demand; shares slightly undervalued.

Twitter logo sign displayed on headquarters building in San Francisco, California.

While awaiting the decision on its fierce legal battle against Elon Musk, Twitter (TWTR) reported disappointing second-quarter results, with revenue and the bottom line missing FactSet consensus estimates. While Twitter’s user base grew impressively during the quarter, the resulting higher ad inventory did not attract more advertisers or higher bids, which we suspect is mainly due to the ongoing questions regarding who will be at the helm of Twitter once the legal battles are settled. In addition, impact of Apple’s policies and uncertainty surrounding the macro environment further made advertisers hesitant. With advertiser pullback a bit more than we had anticipated, we lowered our top- and bottom-line projections, resulting in a $44 standalone fair value estimate (below our previous estimate of $47), given significant uncertainty surrounding the potential outcome of the Twitter and Musk legal battles.

Musk’s attempt to walk away from the agreement to purchase Twitter likely will force the firm’s management and employees to increase their focus on better execution, which could result in better numbers the rest of this year. At the same time, Musk’s request to delay the entire legal process was denied, which means the trial will begin in October 2022. In our view, Twitter likely has a stronger case, which we explained in our July 10 note. We also think that there remains a scenario where Musk and Twitter reach a new, lower-priced agreement. However, we do not expect Twitter to settle for a new price more than 25% below Musk’s initial $54.20 offer. With the stock trading only slightly above levels at which Musk initially began to purchase, other parties may also take an interest in Twitter.

Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.