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Twitter Stock Drops; Analysts Cut Price Targets as User Growth Lags

Wall Street cut its price targets on Twitter after the microblogging site's third-quarter earnings report.

Shares of Twitter  (TWTR) - Get Free Report dropped on Wednesday after a number of analysts cut their price targets on the social-media company, citing its mixed third-quarter earnings, the uncertain impact of Apple's  (AAPL) - Get Free Report privacy changes, and lagging growth in the U.S.

Twitter swung to a third-quarter loss, which missed analysts' expectations that it would be profitable.

The San Francisco company reported ad sales in line with expectations and it said the third-quarter revenue impact from Apple’s privacy-related changes was lower than expected.

Shares of Twitter on Wednesday closed down 11% to $54.81.

Jefferies, which has a hold rating for Twitter, lowered its price target on the microblogging site to $70 a share from $80. 

"Given the continued uncertainty from the iOS changes, we are reducing our [fiscal 2022 revenue and operating profit] estimates by 3% and 6%, respectively," Jefferies analyst Brent Thill wrote in a note to investors.

"We were positively surprised by a lower-than-expected impact from the iOS privacy changes increasing our conviction in $7.5 billion-plus in revenue by fiscal 2023," Thill said.

"We believe investors will be pleased with in-line revenue for the third quarter and revenue guidance of 20% year-on-year growth for the fourth quarter at the midpoint," Thill said. 

But "US users were flat quarter-on-quarter in Q3, potentially raising concerns about US market saturation," Thill added.

Thill's investment thesis still concluded that "improved user products and ad products present addressable growth opportunities, with commerce as a long-tail opportunity." 

Wedbush analysts lowered their price target on the stock to $69 a share from $76 on potentially lower estimates of profit margins based on earnings before interest, taxes, depreciation and amortization.

"Management did indicate that the current cost run rate, which excludes new hires and additional investments next year will lead to costs growing in the mid-20% range in 2022," Wedbush analysts Ygal Arounian and Chad Larkin said. 

That in turn "will likely lead to higher formal cost guidance next quarter, which will lead to lower Ebitda margin estimates for 2022,"

Wedbush, which reiterated a neutral rating on the stock, added that while the third-quarter results were were particularly strong in the US and the impact from Apple's ad-tracking changes was muted, user growth was below the target of 20%.

"We see Twitter as taking the right steps across user and ad products," Arounian and Larkin said in a note to clients.

"But we look to see more proof points that users can march up towards the target, that ad products are gaining traction and are able to create a more favorable [direct response] toolset in particular." 

Direct-response ads are those meant to get consumers to buy, subscribe to or download something right now.

Analysts at BMO Capital Markets cut their target on Twitter to $65 a share from $70 due to initial 2021 expense guidance exceeding the BMO estimate and the Wall Street consensus, "resulting in lower profit estimates despite the consistent revenue outlook."

Twitter said that its monetizable daily active users, or mDAU, rose 13% from a year earlier to 211 million, with U.S. figures rising 4% to 37 million and international totals rising 15% to 174 million. 

"We are market perform as we see a balance of opportunity in improved direct response ad opportunity, offset by the risk of slowing mDAU growth, which would put valuation at risk," said BMO Capital Markets Analyst Daniel Salmon.

And KeyBanc maintained its overweight rating on the microblogging site but lowered its price target to $70 a share from $81.

Twitter shares "still offer modest upside at these levels, but we increasingly need to see more progress with users and direct response to have confidence in 20%+ annual revenue growth," wrote KeyBanc analyst Justin Patterson in a note to investors.

"Revenue of $1.28 billion (+37% year over year) was below our estimate of $1.3 billion but in line with [Wall] Street's estimate of $1.28 billion. [The adjusted Lbitda of $445 million] came in below our and the Street's estimates of $296 million and $316 million, respectively, due to a litigation settlement."

"We view Twitter as an improving execution story, where creating a safer platform for users and better products for advertisers and creators puts revenue on a path to double from 2020-2023 estimates," Patterson added.