Don’t worry about Twitter (Twitter Stock Quote, Chart, News NYSE:TWTR), says analyst Michael Levine, who claims that while the company may have to do some image repairs after its latest quarterly results, the uptrend in user growth is a good sign going forward.
Twitter had been having quite a successful year before it saw much of those gains vanish on Thursday as the company released its third quarter financials which missed analysts’ estimates for both revenue and earnings. The stock dropped over 20 per cent on Thursday and has followed up with a decline on almost two per cent in midday trading on Friday.
Citing “product issues” and a larger seasonal shortfall over the quarter, Twitter managed adjusted profit of 17 cents per share, down from $106 million this time last year and lower than the 20 cents per share expected by Wall Street. Revenue came in at $824 million, up nine per cent year-over-year but also lower than the expected $874 million. (All figures in US dollars.)
The good news was that Twitter’s user base kept growing over its Q3 to 145 million, up 17 per cent from a year earlier, yet at the same time, management gave a chillier-than-expected guidance for both the upcoming quarter and for 2020.
“In Q3 we discovered and took steps to remediate bugs that primarily affected our legacy Mobile Application Promotion (MAP) product, impacting our ability to target ads and share data with measurement and ad partners,” the company said in its shareholder letter. “We believe that, in aggregate, these issues reduced year-over-year revenue growth by three or more points in Q3.”
But while the technical glitch, which minimized Twitter’s ability to target advertising and report back on how well the ads were doing, should get fixed in short order, there are questions about the company going forward, says Levine, senior research analyst for Pivotal Research, who spoke to CNBC on Thursday.
“I don’t think [the advertising problem] is permanent, which is why we stuck with our buy rating on the stock,” said Levine. “Per our pivotal advertising insights product, we thought that there was going to be weakness in the US both in the third and fourth quarters so we actually had cut about a week and a half ago, so it didn’t catch us as much by surprise. I think that the Street was very much caught off guard.”
“My gut says that this is probably more temporal. I think that the challenge for the stock is that you have an overt lower for the fourth quarter and you know that as they talked about in the [earnings call] that they’re going to have headwinds in the front half of 2020, you sort of don’t know when this gets fixed,” he says. “I think that the company has done a laudable job turning user growth around and I think that they should see even better user growth next year around the elections and the Japan Olympics.”
“But your next catalyst is getting Q4 earnings and the Q1 revenue guide where my suspicion is that you’ll probably see a pretty broad dispersion of revenue numbers, and they’re going to guide op ex for the full year so your next update may be another estimate revision lower and I think that’s a challenge for the stock,” he says.
Pivotal Research is maintaining its Buy rating with a $35 target for Twitter, while Goldman Sachs on Thursday downgraded the stock from “Buy” to “Neutral” and dropped its price target from $52 to $34, citing a lack of visibility on the fix of the advertising platform, uncertainty surrounding the company’s ability to grow its advertising and the risk of further multiple compression.
Levine says Twitter likely has some work ahead of it before the market jumps back in.
“I think that this will basically get righted but we’re not talking about Facebook or Google or Amazon where they built credibility over the course of multiple years on things like op ex, and for a company like Twitter you’ve probably got some rebuilding and some faith that needs to get reestablished,” says Levine.