Twitter (TWTR) Will Lag Behind its Peers in Late 2020, According to KeyBanc Capital Markets

Jeeho Yun and Alex Moreno

This week, analysts KeyBanc Capital Markets delivered a number of new initiations within the digital media space, many with Overweight ratings. Among the stocks included, Alphabet, Netflix and Facebook were granted Overweight ratings, but one social media company was left out of the bullish optimism: Twitter, which was met with an initiation at Sector Weight.

Despite the success and high volume of mobile daily active users (mDAUs), the Cleveland-based bank concludes that Twitter’s progress during the pandemic has already been “priced in.”

Though a Sector Weight rating isn’t necessarily the worst news, we find it surprising that Twitter hasn’t seen a more dramatic increase given the amount of volume that runs through that stream. Perhaps as the election race speeds up, we’ll see an uptick in revenue and mDUAs, as many look to Twitter as their first source of news and entertainment. And as more users visit the site everyday, the California-based company has a chance to utilize both new and frequent users as a catalyst for higher average revenues per user (ARPU) from “brand spend and new direct response ads,” according to Key.

Twitter has also been working on other ways to upgrade and make the site easier and more enjoyable for users. For example, users are enjoying the launch of Topics, Lists, Explore, and Fleet and from 4Q19 to 2Q20, over 50 million people were following Topics .

In the second quarter results for 2020, Twitter’s CEO Jack Dorsey said, “Our product work is paying off, with tremendous growth in audience and engagement. We grew mDAU to 186 million, a 34% year over year increase in Q2, the highest quarterly year-over-year growth rate we’ve delivered since we began reporting mDAU growth."

Some focus points analysts projected were: 1) “a mDAU growth of +12% y/y in 2021E and +8% y/y in 2022E, driven by international user growth” 2) “revenue growth will improve to +24% y/y in 2021E and +18% in 2022E, reflecting better ARPU and a larger mDAU base” 3) “gross margin will improve to 64.2% in 2021E and 64.6% in 2022E, reflecting fixed cost leverage” 4) “EBITDA margin will improve to 29.2% in 2021E and 30.5 in 2022E”.

On the other hand, Twitter isn’t immune to large risks in the future despite all of its advantages in the social media realm. Mobile daily active users (mDAU) have accelerated growth both in the U.S and Internationally. However, this growth may be correlated or caused by COVID-19 and the social justice movement, which makes investors question whether users will continue to use Twitter as often after these events.

In spite of the fact that Twitter has high mDAU growth, this increase in user participation is almost a prerequisite for the company to succeed. Realized revenue is “highly dependent on having an engaged audience” given the nature of its platform. In fact, it takes only a slight down tick in engagement for Twitter to have a subpar quarter, which may be unlikely given how loyal users are to the social media network. But Twitter has had issues with privacy in the past that may show its head again in late 2020, and if they’re unable to protect their consumer’s data, they could “suffer both user declines and fines,” according to KeyBanc. 

We’ll see how Twitter performs in the future, but be wary as Twitter has benefits and risks that extend to relatively far measures in each direction.

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Disclosure: At the time of publication, I have no positions in any of the securities mentioned in this article. I wrote this article myself [ourselves], and it expresses my own opinions. I am not receiving compensation for creating this article (other than from TheStreet) and have no business relationship with any company whose stock is mentioned in this article.

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