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Market Update

Twitter's 4Q Shows Caution Signs for Investors

At today's stock price, investors should be more concerned about Twitter's limited reach and slowdown in new user growth, says Morningstar's Rick Summer.

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 Twitter's (TWTR) first quarterly earnings report as a public company showed strong growth in advertising revenue, though continued deceleration in user growth, and surprisingly weaker engagement metrics spooked investors who sold the stock off after the earnings announcement. Even after the sell-off, we believe the stock is overvalued, in spite of a very modest increase to our fair value estimate. We're sticking with our narrow economic moat rating unless the firm is able to reaccelerate growth in its user base.

Total company revenue grew 116% to $243 million, with more than 90% coming from a direct sale of advertising products. Based on management's outlook and our revised forecast, we expect advertising revenue to exceed $1 billion in 2014. Additionally, for the first time in the company's existence, Twitter posted positive operating income after backing out the impact of stock options. Clearly, the company benefited from a strong seasonal quarter, but we would expect the longer-term trend of operating leverage to continue.

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