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Why Twitter's Moat Eroded

We've lowered our fair value estimate and downgraded our moat rating for the social media firm as the slowdown in user growth will hamper monetization.

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Ali Mogharabi: At the beginning of March, we downgraded our moat rating for Twitter from narrow to none. Twitter's slowdown in user growth remains a concern, and as the company continues to invest in product enhancement and video content, the lack of a turnaround in user growth has made user monetization an increasingly difficult task. For this reason, we have less confidence in Twitter's ability to generate consistent excess returns in the long run.

Twitter is not benefiting from increased spending on mobile and online advertising as much as its peers, as the firm's user base and its growth lag other social networks such as Facebook, Facebook's Instagram, and Snap's Snapchat. Twitter's increasing user engagement, driven by some product enhancements, more content, and some large events, has reaffirmed part of our initial thesis, which supported a narrow moat rating. However, the firm's lower than expected user growth and user monetization are indicative of a weaker network effect and the value of user data. 

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

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