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Commentary

Twitter Shares Still Too Pricey

The slowdown in user growth, and subsequent fall in Twitter’s stock price, hasn’t created a buying opportunity for this narrow-moat firm, says Morningstar’s Rick Summer.

Mentioned:

 Twitter's (TWTR) third-quarter results and updated guidance are in line with our full-year forecast, and the company's investments in advertising products are continuing to drive increased revenue on a per user basis. Although user growth has slowed, we believe the uniqueness of Twitter's real-time content platform and mobile advertising growth support our valuation and investment thesis. We are maintaining our narrow moat rating and $39 fair value estimate based on the revision to our model. Although the stock has come down toward our fair value estimate, we would encourage investors to wait for a margin of safety before investing.

Advertising revenue grew 109% and total revenue grew 114%, outpacing growth in monthly average users of 23% to 284 million as improved pricing driven by new advertising products proved successful. Management increased full-year guidance to $1.365 billion-$1.465 billion, very modestly ahead of our prior forecast, while MAU growth continues to be within our expectations. Still, we note the slowdown in user growth and highlight our belief that Twitter will eventually reach 1 billion users over the next decade. However, because the firm can only monetize these users on line, the current deceleration in user growth may lead to negative sentiment in the stock.

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