A year and a half after its public debut, Wall Street is telling Twitter (NYSE:TWTR) it expects more.
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In a messy rollout of its first-quarter earnings on Tuesday, Twitter revealed mixed results with an EPS that beat the Street, but a big disappointment, and its first miss as a public company on the top line.
What really worried investors, who punished the social-media giant by sending shares plunging 20% immediately following the results, was what lied beyond the headline numbers. Twitter warned the Street it expects to see second-quarter revenue falling below expectations, and a full-year revenue range between $2.17 billion and $2.27 billion – that’s significantly below expectations for $2.37 billion, and about 5% below its previous forecast.
Investors haven’t let up on the sell button after a night to digest the numbers. Though Twitter shares recovered from the steep losses in the prior session, Wednesday they continued to trade deep in the red, dropping more than 5%.
For its part, Barclays said it’s difficult to find any silver lining in Twitter’s results. Adding insult to injury, it said though it generally shies away from changing a rating based on earnings and one-day stock moves, this was a quarter that called for it. The investment bank downgraded Twitter to ‘equal weight' with a price target of $44.
“One of our biggest concerns from the call was around the commentary that Twitter does not have a supply problem, but a demand problem. They are not currently delivering enough click/engagement to many advertisers to warrant those advertisers increasing their spend on Twitter or adjusting their quality scores to allow for larger budgets,” Barclays noted.
Analysts at Stifel, who reiterated their ‘sell’ rating on the stock, and lowered its price target to $36, said Twitter’s monthly active users were in line with expectations at 302 million, a 74% increase from a year ago.
“MAU’s are off to a ‘slow start’ and the inclusion of SMS-only users in MAU disclosures going forward could mask Twitter’s true organic user growth,” those analysts said in a note Wednesday.
Further, they worry whether the company’s announced acquisitions of TellApart and a partnership with Google (NASDAQ:GOOGL) DoubleClick will work toward stemming the deceleration in the company’s ad business. Twitter said in its results on Tuesday those efforts are aimed at driving direct-response sales – that’s working with advertisers who use targeted ads on the Twitter platform.
“Management specifically noted factors like [direct response] advertisers limiting spending due to high required bids and a higher bar for what constitutes an ‘engagement’ with website cards,” Stifel analysts pointed out.
Analysts at Janney joined in the downgrade action, dropping its rating to ‘neutral,’ citing decreased ad engagement, light traction in new initiatives, and new competitors including Facebook (NADAQ:FB) Messenger.
Still, amid the flurry of activity, there are some on the Street who believe Twitter will overcome this quarter of disappointment.
Jefferies, which has a ‘buy’ rating with a $42.27 price target, said it was sticking with its long-term outlook as it sees Twitter’s pace of product improvement driving engagement and turning logged-out users into monthly active ones. It sees some changes in Twitter’s platform, including the addition of the ‘while you were away’ featured tweets at the top of users’ timelines, and the Periscope acquisition, as net positives for the future.
“We haven’t lost all faith in Twitter,” Barclays analysts added. “[We] still see a real opportunity for increased engagement, higher ROI and the ability to monetize over time.”
Those analysts noted, though, there is still a looming cloud on Wall Street about Twitter’s long-term future and whether it can carve out sustainable and predictable streams of revenue alongside its growing product offerings. In order for Barclays to step back in from the sidelines, Twitter will have to reveal more clarity on its long-term opportunity and revenue growth.
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