Twitter is having tough days and gradually slipping from market confidence. In a recent development Citi’s Mark May revisited his projections for the company, cut his outlook for revenues, slashed his price target on the stock, and now warns the stock is “High Risk.”
Using a formula accounting for user growth, time spent on Twitter and ad prices, May lowered his 2016 advertising revenue forecast for the company by 4.7%, from $3.010 billion to $2.868 billion, about $145 million dollars.
May lowered his price target for the share price from $37 to $30. He changed his rating from “Neutral” to “Neutral/High Risk”. “We rate Twitter High Risk because its high multiple (23x CY16 EBITDA) creates risk for significant multiple compression,” he wrote. “In addition, Twitter’s shares have proven to be especially volatile relative to other Internet stocks.”
The below screen grab shows you how Twitter stocks have dropped from $36 to $26 in the last six months.
The latest development comes close on the heels of eMarketer’s lowered growth estimates for Twitter from April. Ad revenues are expected to increase by 61.8 percent this year to $2.03 billion, giving Twitter 8.1 percent market share among social networks. In April, the growth rate was pegged at 66.9 percent.
While worldwide social network ad spending is accelerating even faster than expected, all thanks to Facebook’s growth but Twitter user growth problem is affecting Twitter’s ad business. The company reported 304 million monthly active users, up only 2 million since the first quarter.
The bigger bad news for Twitter is that US, which gets the company its maximum revenue, has been at a stand still with user growth. In its second quarter financial earnings statement, the social network had 65 million monthly active U.S. users – the exact same amount as last quarter.
On a global level, Twitter will capture $7.75 per user in 2015. By 2016, eMarketer forecasts Twitter to capture $10.12 per user worldwide and $32.22 per user in the US. “Twitter’s slowing user growth is impacting its ad business,” said eMarketer principal analyst Debra Aho Williamson.
“Twitter has improved its ad targeting capabilities, and it still has a lock on real-time conversation. However, advertisers want to reach a mass audience and that’s harder to do on Twitter than on Facebook.”
May has also stated the same concerns predicted by eMarketer, which is Twitter’s inability to get people to engage with its ads. “Because we believe Twitter’s ad load has little room to increase in the US, achieving such an increase in monetization will largely depend on the company’s ability to drive higher pricing and click-through rates,” he said in a note to clients Wednesday. “We believe this is unlikely and are lowering our US ad revenue forecasts accordingly.”
Twitter has figured out its problem but if we go by Twitter’s Finance Chief Anthony Noto’s word then the user problem isn’t going to be good any sooner. “We do not expect to see sustained meaningful growth in MAU until we start to reach the mass market. We expect that will take a considerable amount of time.”
Even though Twitter had posted better revenues in Q2 compared to Q1 2015, the user growth problem has raised questions on Twitter’s IPO balloon. Core staff is leaving, shares are dropping drastically and its hunt for a permanent CEO still continues.
Looks like Twitter’s time is running out and it will have to do some drastic changes to regain confidence in the Street.