Shares of Twitter (TWTR) are sliding following the company's release of first quarter results and second quarter guidance. In the wake of the report, Bank of America Merrill Lynch downgraded the stock to Underperform, a rating equivalent to sell, amid concerns over user growth. The bearish view is shared by JPMorgan analyst Doug Anmuth, who also downgraded the shares to Neutral as challenges continue.
USER GROWTH DECELERATION: Bank of America Merrill Lynch downgraded Twitter to Underperform from Neutral, as analyst Justin Post noted that user growth decelerated further to just 3% and said the company's second quarter revenue growth outlook at 19% at the midpoint suggests further revenue deceleration. The analyst believes Twitter is facing potential challenges growing monetization of the users that have stayed with the platform as usage shifts to video, adding that while second quarter guidance could be conservative, he has less confidence in forward estimates. Post set a $15 price target on the shares.
CHALLENGES CONTINUE: JPMorgan's Anmuth downgraded Twitter to Neutral from Overweight, saying the company's first quarter results show its user and advertising challenges continue. Product changes have been slower and less impactful than expected, with Twitter facing increased competition from Facebook's (FB) core Newsfeed, Instagram and Messenger, as well as from Snapchat, Anmuth told investors. The analyst noted that users could benefit more in the second half of 2016 from the Olympics, Euro 2016, U.S. election, and the NFL streaming deal, but execution will be "critical" and competition is narrowing the opportunity for growth. Anmuth lowered his price target on Twitter's shares to $18 from $26.
SOFTER ADVERTISER DEMAND: Oppenheimer analyst Jason Helfstein said Twitter guided second quarter revenue 11% below consensus on softer brand-advertiser demand, which implies flat sequential growth, with management attributing some of the weakness to U.S. advertising growth more dependent on budget share. The analyst believes the company is now losing ad share to other social channels and sees limited near-term catalysts. Helfstein reiterated a Perform rating on the shares. Baird analyst Colin Sebastian lowered his price target on Twitter's shares to $16 from $18, saying that the soft second quarter guidance reflects the ongoing demand headwinds. While newer ad formats such as video and dynamic product ads are driving better engagement, advertisers appear reluctant to allocate incremental budgets to the platform, the analyst told investors. Baird has a Neutral rating on the stock.
RESULTS: Yesterday after the market close, Twitter reported Q1 EPS of 15c, above consensus estimates of 10c, and Q1 revenue $595M, below consensus of $607.84M. The company now sees Q2 revenue of $590M-$610M, far below consensus, which stood at $677.6M prior to the report.
PRICE ACTION: In morning trading, Twitter's shares have slid more than 14% to $15.19.
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