- CAN’T MAKE ANYONE HAPPY: TWTR produced upside to estimates off its subdued 2Q15 guidance, with the high end of 3Q guidance edging above consensus. But TWTR lost the crowd when it tempered MAU expectations during its call. This remains a recurring theme given its conflicting growth drivers; any upside to revenues comes at the expense of MAU growth since its monetization strategy is driven off surging ad load, which has historically pushed its users away. Since the streets demands upside on both, TWTR can’t make anyone happy (see note below).
- ACCELERATION IN THE WRONG SPOT: Even as bears, we were very encouraged by TWTR’s new-found CPE tailwind on its 1Q15 print, which speaks volumes to advertiser demand (product mix and/or advertiser counts). That reversed course in 2Q15, with CPE yielding in favor of a reacceleration in ad engagements, which we believe is synonymous with a spike in ad load (see note below). Our bearish thesis has centered on this monetization strategy; there is only so much ad load its users are willing to absorb, especially since the bulk of its revenues comes from mobile.
- GRAB THE BULL BY THE HORNS: While we remain short, we were uneasy into the print since it all came down to how management addressed the street. TWTR’s problem throughout its short public history has been that mgmt has been too scared to manage the lofty expectations that have crippled its stock to date. While we are encouraged that TWTR didn't overextend itself on 2015 guidance, consensus 2016 advertising revenue estimates remain a stretch. TWTR will need to rebase expectations again, so we remain short. But if TWTR can get to the point where it doesn't make questionable near-term business decisions in attempts to appease shortsighted sell-side expectations (see point 2), then there could eventually be a long here.
TWTR: Rock and a Hard Place (1Q15)
04/29/15 08:15 AM EDT
Let us know if you have questions, or would like to discuss in more detail.
Hesham Shaaban, CFA