Weak User Engagement Weighs on Twitter
The no-moat firm will have to invest heavily to keep users coming back to its platform, and we recommend a wider margin of safety before investing.
Twitter (TWTR) reported a better-than-expected fourth-quarter top and bottom line, as the firm’s user monetization continues to improve. However, the daily active user count, which Twitter just began disclosing, confirmed our initial assumption that user engagement on the Twitter platform is lower than its peers, which may hinder faster ad revenue growth. This also supports our no-moat rating on the firm. In addition, as Twitter plans to further invest to improve engagement, enhance the platform, and operate more efficiently overall in the long term, operating margin is likely to decline in 2019, as indicated by management’s guidance. We adjusted our projections accordingly, and after rolling our model forward, we increased our fair value estimate to $30 per share from $28.50. Although Twitter shares are trading more than 10% lower in reaction to the company’s guidance, the stock remains in 3-star territory, and we continue to recommend a wider margin of safety before investing in this very-high-uncertainty name.
Fourth-quarter revenue came in at $909 million, up 24% year over year. Ad revenue grew 23% from last year to $791 million as Twitter continues to improve the monetization of its users. Data licensing revenue increased 35% from last year to $117 million. GAAP operating margin of 23% was 800 basis points above last year’s as top-line growth and gross margin expansion (mainly due to higher growth in the high-margin data licensing revenue), plus less growth in R&D and sales and marketing expenses, created further operating leverage.
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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.
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