Here’s why UBS has cut Twitter to sell
UBS has cut its rating on Twitter to ‘sell’ following the social media firm’s fourth quarter results last night.
Despite revenues more than doubling, Twitter saw a slowdown in the growth of new users and this is the main reason for the downgrade.
Following the results, shares fell as much as 18 per cent.
Engagement worries are now at the fore for the company, said UBS in a note this morning. It says it sees little potential for upside in estimates over coming quarters.
As “one of the most expensive stocks in the universe”, the bank thinks it unlikely that outperformance can be sustained, particularly given the questions raised by the earnings report.
Over the medium term, it expects Twitter’s stock to under perform during a series of quarters which it hopes will lead to better user growth and engagement. It says:
A lack of mainstream adoption or a more simplified use case was a worry of ours coming out of the IPO and seems to have come to the fore faster than we had anticipated.
In addition, a small February employee share lockup (9.9m shares) and a larger May lockup (465m shares) will cause headwinds to stock performance.
Once these medium-term headwinds have passed and/or Twitter demonstrates a clearer trajectory of user & advertising growth, we could become more constructive as we consider Twitter a unique social media platform with long-term monetization potential.
In other words, headwinds need to turn to tailwinds for Twitter to see growth, and for the bank to be more upbeat.
UBS has revised its estimates for the company, anticipating revenues of $242m (from $223m) for the first quarter of the year.
For the full year, it forecasts revenues of $1.22bn (from $1.21bn) and adjusted earnings before interest, taxes, depreciation and amortisation of $177m (from $154m). When it comes to adjusted earnings per share for 2014, the bank has increased its estimate to $0.04 from $0.01.
Its price target on stock is $42 (previously $45).
Twitter closed down 0.53 per cent.