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Twitter’s Q2 Results Impressive? This Analyst Doesn’t Think So
Stock Analysis & Ideas

Twitter’s Q2 Results Impressive? This Analyst Doesn’t Think So

Last week, Twitter (TWTR) posted strong second-quarter results. The social media company’s revenues surged 74% year-over-year to $1.2 billion, beating the consensus estimate of $1.06 billion. Adjusted earnings came in at $0.20 per share, up 45.5% year-over-year, surpassing Street estimates of $0.07 per share.

Meanwhile, Twitter’s average monetizable daily active usage (mDAU) jumped 10.8% year-over-year to 206 million.

Outlook for Q3 and FY21

For 2021, TWTR expects total revenues to rise faster than its expenses, “assuming the global pandemic continues to improve and that we continue to see modest impact from the rollout of changes associated with iOS 14.5.”

For Q3, total revenue is anticipated to be in the range of $1.22 billion to $1.3 billion. Operating income on a GAAP basis is expected to range between a loss of $50 million and a break even situation.

Analyst Remains Unimpressed

Despite the strong showing, Rosenblatt Securities analyst Mark Zgutowicz remained unimpressed with the Q2 results and remained sidelined on the stock. The analyst reiterated a Hold and “modestly” raised the stock price target from $60 to $65 (9.3% downside).

The analyst viewed the rise in revenues as predominantly fueled by higher event-driven spend from existing advertisers, rather than by new products or advertisers.

Indeed, Twitter did state in its shareholder letter that the 87% year-over-year rise in advertising revenues was driven by improvement in its brand and direct response (DR) advertising products and “a broad increase in advertiser demand.”

Now let’s look at the rationale behind the analyst’s view.

Twitter: a Product with a Niche Audience

According to Zgutowicz, TWTR still remains a product with a niche audience and has a “structurally deficient platform for DR advertisers.” The analyst maintained that these limitations of TWTR are “often-masked in event-driven periods like 2Q’s post pandemic/up-fronts and 3Q Olympics etc.”

While the analyst applauded the company’s management for adding utilities like Topics and Spaces for existing and prospective Twitter users, Zgutowicz believes that for TWTR to appeal to a wider audience, it still needs a far simpler user interface (UI).

Furthermore, with Twitter having the smallest audience among social media sites in the United States, its advertising returns will need to exceed its other social media competitors, according to Zgutowicz. The analyst doesn’t think this will happen anytime soon.

mDAU Expected to Remain Flat in Q3

Twitter’s mDAU in the U.S. has stayed flat or grown sequentially by one million over the last four years in Q3. As a result, TWTR expects its mDAU in the U.S. in Q3 to remain flat sequentially. (See Twitter stock chart on TipRanks)

Meanwhile, analyst Zgutowicz anticipates that TWTR will face a tough comparison to other social media companies when it comes to daily active users (DAUs) for 2021. Furthermore, heexpects the company to have lost 5 million to 6 million DAUs this year as a result of the exit of Trump followers from TWTR and “pandemic pull-forward.”

Turning to the rest of the Street, consensus is that TWTR is a Moderate Buy based on 10 Buys, 15 Holds, and 1 Sell. The average Twitter price target of $74.09 implies 3.4% upside potential to current levels.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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