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Twitter's Slowing User Growth Is Cause for Alarm

Financial results improved in the social media firm’s second-quarter, but we're lowering our fair value estimate as user growth slows, writes Morningstar analyst Rick Summer.

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Although strong revenue growth marked  Twitter's (TWTR) second-quarter results, our concerns about slowing user growth are heightened. We would not be buyers of the stock at current levels, and we anticipate cutting our fair value estimate to $27 per share from $36 for this narrow-moat firm. While we can't deny the uniqueness of Twitter's content platform, its limited reach is likely to cap the upside for this social media company.

Monthly users grew only 0.7% sequentially to 304 million, while U.S. monthly users remained at 65 million, showing no growth. Annually, global users grew only 12%, while engagement (measured as daily users divided by monthly users) shrank from 48% to 44%. These trends are not encouraging. Advertisers have many alternative outlets to reach a larger user base on a targeted and near to real-time basis, including  Facebook (FB), Instagram, and Pinterest. We are concerned that Twitter may not represent a mass-market social media platform, and its advertising reach may level off at a lower user base than our previous forecast. As a result, although we expect continued increases in ad pricing and number of ads shown to each user, we are reducing our long-term revenue forecast.

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