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Twitter Struggles to Gain Altitude

As user growth slows, we remain concerned that the company won't become a mass-market social platform and anticipate trimming our fair value estimate.

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 Twitter (TWTR) announced third-quarter results demonstrating strong advertiser growth, but very slow user growth. Although management continues to de-emphasize Twitter's reported Monthly Active User, or MAU, numbers, we remain concerned that the company is unlikely to become a mass-market social platform. We anticipate cutting our fair value estimate to $25, although we are sticking with our narrow moat rating at this time.

Twitter has a singular ability to deliver targeted advertising to its user base because of its unique customer dataset, which the company calls an "Interest Graph." Nevertheless, we think the company's growth and profit opportunities are limited by slowing growth of its "logged-in" users, particularly compared with larger Internet competitors such as  Facebook (FB) and  Google (GOOGL) (GOOG). MAUs grew to 320 million, representing 1% sequential growth, and 8% growth versus 2014. While we believe advertisers appreciate their ability to target Twitter users, we think the firm has limited reach and advertising inventory that would allow the company to become a "one-stop shop" for digital advertising budgets. These users (and the proprietary data about their interests) provide Twitter with competitive differentiation and the primary foundation for revenue growth. We are increasingly concerned that the potential userbase may become saturated.

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