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Despite a Strong Quarter, We Still See Risks at Twitter

We still question Twitter's ability to reach the scale of the Internet giants, writes Morningstar’s Rick Summer.

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 Twitter's (TWTR) fourth-quarter results benefited from continued growth in advertiser demand, although, based on slowing user growth, we remain cautious about the company's ability to achieve the same mass-market penetration of large Internet companies such as  Google (GOOG),  Facebook (FB), or  Yahoo (YHOO). Regardless, we were encouraged by the firm's revenue growth and continue to believe the company has a unique ability to target its users on a "real-time" basis, and we reiterate its narrow moat rating. Additionally, we may have a very modest increase in our fair value estimate, which currently stands at $40.

Continued deceleration of growth in monthly active users (MAUs) is not altogether troubling, but it ultimately places an upper bound to our thesis. If Twitter users grow faster than our current forecast, we believe our valuation (and moat rating) may prove to be too conservative. We believe advertisers are attracted to 1) massive reach, which at Internet scale, equates to nearly a billion users, and 2) unique targeting capabilities. We still question Twitter's ability to reach the scale of the Internet giants.

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