Despite a Strong Quarter, We Still See Risks at Twitter

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.

MAUs reached 288 million, growing approximately 20% versus 2013 and 1.4% sequentially. As compared with Facebook's MAUs of 1.3 billion, Twitter's reach pales in comparison. Furthermore, we estimate Facebook's daily reach is more than 7 times that of Twitter. Management is clearly aware of the need to grow its user base, and the company has struck several deals in the past week in order to address user growth, in our view. (We note that these deals are likely to have the ancillary effect of growing near-term revenue as well.) Notably, the company signed a deal with Google, allowing the search giant to index Twitter content, a relationship that previously ended in 2011. We believe the relationship has been reignited at the behest of Twitter in an attempt to drive traffic and awareness to Twitter content and ultimately grow its user base.

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