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Twitter's Narrow Economic Moat Looks Promising

But investors should evaluate potential user and advertising growth before investing in the firm.

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Key Takeaways

  •  Twitter's narrow economic moat shows promise and may be widening. We have awarded Twitter a narrow moat rating and believe the firm could eventually earn a wide economic moat. While the social network has yet to achieve the reach of Google or Facebook, its network effects and proprietary customer dataset provide formidable competitive advantages.
  • Twitter's revenue growth depends on its success in advertising. Twitter has increased its quarterly ad revenue per user to $0.66 in the third quarter from $0.41 in the third quarter of 2012. Still, this metric trails  Facebook (FB) ($1.38 in the second quarter) by a significant amount.
  • Growth and improved competitive positioning depend on increased engagement and user growth. User growth will help expand the company's reach and, we believe, provide the critical mass necessary to capture new advertising budgets that depend on reaching a minimum number of users. Furthermore, engaged users will highlight the platform's differentiation, strengthening the network effects and increasing advertising spending.

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