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Stock Analyst Update

Standing Pat on Twitter’s Fair Value Estimate

We still think Twitter has no economic moat and would wait for a cheaper price before buying, but the market is likely overreacting to the lack of user growth.

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 Twitter (TWTR) reported better-than-expected second quarter 2017 results. Lack of growth in monthly active users disappointed the Street; albeit it was in line with our internal assumption as we had taken seasonality into account. Continuing growth in user engagement was encouraging. Twitter also showed its ability to monetize the intangible asset, which is user behavior data that it compiles. However, we continue to view Twitter as a no-moat company as lack of stronger user growth can minimize the benefit of a network effect and limit the impact of its user data on the company’s ability to generate excess return on capital in the long run. In the meantime, we remain confident that the higher user engagement may attract more advertisers, possibly helping the firm to return to near double-digit revenue growth in 2018 after a one-year hiatus. While Twitter shares are down 13% due to what the Street views as disappointing user growth, we are maintaining our $17 fair value estimate and continue to recommend a higher margin of safety before committing capital to this no-moat and very high uncertainty rated name.

Total second-quarter revenue came in at $574 million, down 5% year over year, due to lower ad pricing and continuing impact of Twitter no longer focusing on TellApart, the retargeting business. Total ad revenue of $489 million represented a 9% decline over the prior year, which included $30 million-$50 million in sales from TellApart by our estimates. The firm’s data licensing revenue went up 26% year over year to $85 million. Twitter is now more aggressively monetizing the user behavior data that it gathers on its main platform. Twitter’s gross margin declined about 300 basis points from last year to 63% as Twitter continues to invest in the costlier premium video content. The firm’s GAAP operating loss of $38 million was an improvement from last year’s $86 million loss, mainly due to some cost control and the benefits of the firm’s restructuring a year ago. 

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