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Why Twitter Can't Be Facebook

Thu, 31 Jul 2014

With lower user time spent on its platform and user data collected, Twitter's ad revenue has constraints versus Facebook, and investors should moderate their expectations.

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Video Transcript

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

Twitter shares are soaring after better-than-expected second-quarter results. I'm here with Rick Summer, an equity strategist at Morningstar, for his take.

Rick, thanks for joining me this morning.

Rick Summer: Sure thing.

Glaser: Twitter's results seem to have surprised the market. What looked so good in this quarter?

Summer: I think there are two primary things. Number one, we did see an acceleration in MAUs, or monthly average users, and that's really key to becoming a mass market advertising platform.

Secondly, we also saw some engagement numbers, but more importantly from my perspective, ad revenues per monthly average user continue to creep up as well. It's looking very, very attractive in terms of that level of monetization.

Glaser: How does that look compared to, say, Facebook or other results we've seen so far this quarter?

Summer: That's an important lens to look through. It still does pale in comparison to a company like Facebook. Twitter still has less than half the revenues per user of a company like Facebook. But when you look at the amount of time users actually spend on Facebook, that should be expected. We continue to point to valuation with the understanding that, Twitter cannot necessarily be Facebook. That level of monetization does have constraints and limits on it based on the amount of time spent and the amount of information that Twitter actually does have about its users.

Glaser: So what does this mean for your outlook for the company. Where do you see Twitter going in the future?

Summer: We had a really nice, healthy pop in the stock this morning, and aftermarket yesterday as well. We've moved our own fair value up quite demonstrably. We've moved from $29 to $39 a share. This was affected primarily by our bull-case scenario. If everything goes right for the firm, we think this could actually be worth $76 a share. But everything does have to go right [in that scenario], and when we look at a prudent valuation, we're looking more at $39 a share. We have to recognize there is risk in this name, and we feel much more balanced in recommending that people really lighten up or avoid the shares at current prices.

Glaser: So valuation does seem too much at the moment.

Summer: Absolutely. It's really well extended. We wouldn't encourage any of our investors to short the shares, per se. But really looking at a balanced view of where the company is, these shares are pretty well over-extended.

Glaser: Rick, I certainly appreciate your thoughts this morning.

Summer: Thanks a lot.

Glaser: For Morningstar I'm Jeremy Glaser. Thanks for watching.

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