Twitter: #Where Is The Pulse?

| About: Twitter, Inc. (TWTR)


TWTR's Q1 continues to show near-term challenge in operating outlook.

Lower commitment from advertisers will be an overhang on revenue while long-term challenges from messenger apps remains.

Remain bearish on TWTR.

Twitter (NYSE:TWTR) reported Q1 revenue that trailed consensus while EPS beat on cost-cutting efforts. The bigger question is whether TWTR can continue to remain relevant as the number of digital media platforms proliferates. As I have argued before, TWTR has been finding near-term support due to the scarcity of social media platforms. As marketers have broader options, such support is likely to diminish. Q1 results clearly showed that company's near-term operating outlook will continue to be challenged and this will further weigh on the potential of a near-term recovery. In short, the scarcity of social media platforms in digital media may have supported TWTR's ad revenue growth as advertisers allocate budget to online, but the sales miss this quarter could be an inflection point for the company that such a luxury may no longer exist.

As rival Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) ramp up on their respective messenger platforms that feature rich media and social networking features, TWTR will likely to lose further relevance in the social media space. Although the company underwent several managerial changes to drive a turnaround, it is evident that execution is subpar at best and this begs the question "where do we go from here?" At 20x 2017E earnings, the stock is cheaper than ever but appears to be more of a value trap than a value play. I remain bearish on TWTR. For those investors who are still hopeful of TWTR, look no further than its Chinese comp Weibo (NASDAQ:WB), which is facing similar operating risk due to the success of Wechat mobile messenger that offers a far more compelling mobile ecosystem than solely social media. As such, WB is gradually losing mainstream traction and I suspect TWTR could see a similar fate after FB scales its FB Messenger with features similar to that of WeChat.

Revenue of $595 missed the consensus estimate of $607.5m and came in at the low end of the forecast range because brand marketers did not increase spending as quickly as expected. This is concerning given that brands could be finding alternative social media platforms to replace TWTR, which will be a further drag on revenue in the coming quarters and certainly reflected in the Q2 guidance in which TWTR sees $590m-$610m in revenue vs. consensus $677.1m and adj. EBITDA of $145m-$155m vs. consensus $172.9m.

On the cost side, cost cutting helped adjusted EBITDA of $180.5m to beat consensus $157.3m and this largely drove the $0.15 on EPS vs. the $0.10 consensus expectations. Earnings driven by cost cutting due to a weaker revenue outlook is rather low quality, in my view.

Although active users of 310 million was ahead of the 308 million consensus estimate, it was largely driven by international (+4% y/y) while the US saw no user growth. This is concerning given that the US remains the most feasible market for TWTR to gain user share while the international market growth could eventually be challenged by the proliferation of mobile messenger apps that have increasingly add timeline features that rival those of TWTR.

Will the latest NFL deal save TWTR and attract marketers to its platform? Yes but the impact remains uncertain and I would remain on the sidelines. For investors who are looking to gain exposure to social media stocks, FB remains my top pick followed by Tencent (OTCPK:TCEHY).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.