Those Betting Against Twitter Stock Now Will Kick Themselves Later
Twitter, Inc. (NYSE:TWTR) has gotten support from big name billionaires like Prince Al-Walid bin Talal, head of the Kingdom Holding Company (KHC), and Steve Ballmer, former CEO of Microsoft. This has helped the stock find support on Wall Street. However, this morning in pre-market trading, Twitter stock dropped five percent faster than CEO Jack Dorsey could tweet for help.
Investors are penalizing the social media microblogging company because Morgan Stanley issued an “underweight” rating for Twitter. (Source: Lara O’Reilly, “Morgan Stanley just slammed Twitter,” Business Insider, October 21, 2015.) Analyst Brian Nowak issued the rating in response to a low rate of growth among Twitter users and a lower level of active participation. Morgan Stanley cut the price target from $36.00 to $24.00, down from the $30.91 Twitter stock closed at on Tuesday.
When companies like Twitter that are models for the new digital economy start losing support, the effects tend into ripple to the sector as a whole. The fear of a bubble is always lurking behind the latest analyst report and rating. The stock market crash of 2001-2002 was the first reality check on internet stocks, raising many questions of the valuation of these companies.
Fears of profitability in the medium-term return on investment spread enough fear to prompt a sudden sale, which deflated the bubble. The same question persists now and Twitter is one of the barometers of the sector. Morgan Stanley is telling us that it considers Twitter’s user growth (now standing at some 300 million) to be slow. It also warns Twitter has no profits while advertisers seem to prefer Instagram, Pinterest or other social sites.
Twitter Needs to Evolve
However, things are changing and we are no longer in 2001. By Morgan Stanley’s logic, Tesla Motors should also be heavily downgraded because it too, like Twitter, has no profits. Nor does Amazon.com. Analyst Brian Nowak cut his Twitter stock price target to $24.00, which is 22% below Tuesday’s closing price of $36.00.
Morgan Stanley’s Nowak does not believe Twitter can double its revenue base through 2017, as the analyst consensus expects the given that active user growth is falling. Nowak is most concerned about advertising appeal, noting Twitter’s load is 10 times higher than Facebook when adjusted for time spent, potentially establishing an ad ceiling, reducing the click-through rate. (Source: Twitter’s stock drops after Morgan Stanley downgrade to lowest underweight rating, Marketwatch, Oct. 21, 2015.)
Nevertheless, Morgan Stanley has downgraded Twitter before and Twitter always chirped back. In 2014, Morgan Stanley argued that Twitter stock was also “underweight,” downgrading it from “equal weight.” In practice, this amounts to urging investors to sell basing their opinion on the fact that Twitter’s success is far from being guaranteed.
Then as now, Morgan Stanley used Facebook as the comparative factor. In 2014, the bank saw Facebook as having a significant advantage over Twitter given that both companies compete in terms of advertising. (Source: Dan Weil, “Twitter Shares Slump after Morgan Stanley Downgrade,” Newsmax Finance, January 6, 2014.)
The bullish response to Morgan Stanley, other than to point out the strong appeal Twitter stock has developed among activist investors such as Prince al-Walid bin Talal, is its ability to innovate quickly. Twitter recently started to allow users to submit surveys by asking questions to their followers by offering two answers from which to choose.
This Could Be a Catalyst for Twitter Stock
The mini surveys that could be used to determine trends, leading to a renewed interest from users, including companies wanting to determine the popularity or appeal of a new product and any number of similar possibilities. Companies like Twitter grow because of simple changes and innovations like these.
For example, a survey may start as a simple debate over the “prognosis” for the final of the FIFA World Cup, the World Series or who people will vote for in the 2016 presidential election. Its community of 300 million users can grow quickly through changes such as these. Twitter plans to offer the new feature called Twitter Questions worldwide after testing it in a limited number of countries.
The advantage for the surveys is that voting is private and lasts a period of 24 hours. After this period, the result appears with a percentage distribution between the two.
Twitter is a favorite among political leaders, such that some have coined the term “Twiplomacy,” that is the art of diplomacy in 140 characters. Barack Obama and Pope Francis still occupy the top spots of the poster with some 57 million subscribers, while the second has almost 20 million followers. Indian Prime Minister, Narendra Modi, along with his 10 million followers, is the third most-popular leader on Twitter.
In other words, more than a stock, Twitter has become an institution with endless possibilities for growth regardless of what Morgan Stanley’s predictions of its stock performance in the short term.