Something’s been ‘bugging’ Twitter Inc. investors lately.
The stock TWTR, -2.23% is down some 14% since the company’s last earnings report, when Twitter’s management disclosed an advertising bug that was hurting its ability to target ads based on user interests. Whether Twitter has resolved the issue remains an open question heading into its next Thursday morning report.
“[W]e believe Twitter will prioritize platform investments in spite of near-term bug-related revenue headwinds,” wrote Baird analyst Colin Sebastian in a note to clients late last month. Though he said the troubles with Twitter’s mobile-app promotion ad feature are “most likely a bump in the road,” he assumes they will still cause challenges for the company in the first half of the year.
Even so, Sebastian thinks Twitter’s management team will keep plugging away with spending initiatives on product enhancements, something that could weigh on margins in the near term, especially if bug-related headwinds negatively impact revenue to start the year.
The bug problem threatens to overshadow some of Twitter’s progress elsewhere, wrote Instinet analyst Mark Kelley, who has a neutral rating and $34 price target on the stock. Twitter “seems to be adding [monetizable daily active users] at a faster clip than expected, but the company needs to address the recent product hiccups from last quarter before investors get more excited.”
He added that sentiment toward Twitter is among the weakest for internet stocks headed into an earnings report even as third-party data from mobile-app research company SensorTower indicate that Twitter may have added 6 million to 8 million monetizable daily active users on a sequential basis, above the 2 million FactSet consensus.
What to expect
Earnings: Analysts surveyed by FactSet expect that Twitter earned an adjusted 29 cents a share in the December quarter, down from 31 cents a year prior. According to Estimize, which crowd sources projections from hedge funds, academics, and others, the average estimate also calls for 29 cents in adjusted earnings per share.
Revenue: The FactSet consensus sees Twitter’s revenue rising to $992 million from $909 million a year earlier, while Estimize is calling for a top line of $996 million.
Stock movement: Twitter’s shares have been treading water over the past year, down 3% in a 12-month span as the S&P 500 index SPX, -1.77% has added 19% The stock tends to make big swings after reporting earnings, moving by a double-digit percentage after seven of the company’s last 10 reports, including a 20.8% decline back in October. Analysts have a muted view of Twitter’s stock, as 11 of those surveyed by FactSet rate the stock a buy, 27 rate it at hold, and seven call it a sell.
What else to watch for
Baird’s Sebastian wonders if Twitter’s attempts to fix the ad-bug issue will lead to long-term changes for the better in terms of the ad products it offers.
“In particular, fixes to [mobile-app promotion] could be a pathway to make a broader push into direct response advertising, which we have consistently highlighted as necessary for Twitter to tap into larger buckets of online ad spend,” wrote Sebastian, who rates the stock at neutral with a $39 target price. “For example, we see plenty of opportunity for Twitter to connect businesses directly to consumers who are open to buying products and services.”
Citi Research analyst Jason Bazinet will be monitoring Twitter’s ability to generate more money from its user base. “A large portion of Twitter’s historical revenue growth has stemmed from converting [monthly active users] to [daily active users],” he said, but the company hasn’t seen “material” growth in its revenue per [daily atcive user] over the last four years.
He rates Twitter shares at neutral with a $35 target price.
Twitter’s management may discuss how the company is preparing for a number of big events this year, including the Olympics and the U.S. presidential election, the latter of which could already be having an impact on the company’s ad revenue. Despite the hype over those events, however, UBS analyst Eric Sheridan recently expressed caution on Twitter’s outlook for the year ahead, writing that the company’s operating-expense forecast could come in higher than the consensus forecast currently models.
He has a neutral rating and $35 target price on the shares.