SAN DIEGO, Calif. (TheStreet) -- Citi initiated coverage of Twitter (TWTR) - Get Twitter, Inc. Report Tuesday with a "neutral" rating and a 12-month $53 price target, just a 5% premium over Monday's close, as the micro-blogging social network may face stiff competition for investment dollars from its larger competitor.
Citi's humble price prediction means that the firm believes that Twitter's current $31 billion market capitalization is already padded by its long-term potential. And from the firm's bird's-eye view, Twitter's business is good but Silicon Valley rival Facebook (FB) - Get Facebook, Inc. Class A Report is a "more compelling investment" than Twitter.
"In short, we believe Twitter's current valuation already reflects bull-case assumptions for key metrics like user growth and monetization," Citi analyst Mark May wrote in the firm's note.
Specifically, May thinks Twitter is trading at a price that assumes monthly active users (MAUs) will grow to 620 million people by 2024 with an engagement rate of 8 daily timeline views per MAU by the same year. Based on the firm's survey of U.S. Internet users, Twitter has already reached 45% of its U.S. total addressable market, making it difficult for the company to pick up the pace on user growth. That is, "unless the company is able to create new use cases for the service, make the user interface and content experience more accessible, and increase the number of personal users within networks in order to increase sharing and engagement," May wrote.
In the Facebook versus Twitter realm, Citi prefers the larger social network's more engaged audience -- Facebook gets more than five times the minutes per active user than Twitter -- its profitability, and its potential to growth faster with the help of WhatsApp, Instagram, and sophisticated advertising technology courtesy of new products like the Atlas ad platform. Plus, from an audience growth standpoint, Facebook is adding three times as many MAUs per quarter as Twitter.
Twitter reports earnings on Monday, Oct. 27 and analysts surveyed by Thomson Reuters believe the social network will earn an adjusted profit of 1 cent per share on revenue of $351.35 million. Beyond the top and bottom lines, Twitter's key metrics will be audience size and user engagement rate.
For the third quarter, Citi is modeling $353 million in revenue for Twitter, an adjust profit of 2 cents per share, and an active user base of 282 million people, or 22 percent year-over-year growth.
The company needs to improve its 271 million-member audience with at least 16 million monthly actives to match last quarter's satisfactory results. Anything north of 287 MAUs will ease some of Wall Street's anxiety around whether Twitter can still grow its audience. Though analysts don't expect a material impact just yet, they still want to hear more about the company's "Buy" buttons.
While Citi's $53 price target doesn't leave much room for stock growth, the firm expects the stock to post near-term gains as consensus estimates for 2015 "still appear too low." He may be right. Twitter's stock is up more than 1% at $51.30 in the early afternoon in spite of Citi's mixed initiation note.
--Written by Jennifer van Grove in San Diego, Calif.
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