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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.

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

Overall revenues grew 58% to $569 million, bolstered by the advertising segment, which represented 90% of the quarterly total. Gross margins declined 80 basis points to 64.8%, as 11% of revenues came from placing advertising "off network" (versus 2% in 2014). The growing "off-network" advertising requires payments to publisher partners in the form of traffic acquisition costs. We do not currently believe that the off-network business represents a competitively advantaged platform, particularly in the face of competition from Facebook and Google.

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About the Author

Rick Summer

Strategist

Rick Summer, CFA, CPA, is a technology strategist for Morningstar, responsible for Internet and technology research. Before assuming his current position in 2014, he was a senior equity analyst. He joined Morningstar in 2005 as an equity analyst, covering software and Internet companies. He has operating experience in the wireless and software infrastructure industries and has worked as a private equity investor for UBS Global Asset Management.

Summer holds a bachelor’s degree in business administration from Emory University and a master’s degree in business administration from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation and is a Certified Public Accountant (CPA).

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