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Macquarie (USA)
Equities Research
The Equities Research Specialist
Twitter - TWTR US

United States

Underperform

Too Far, Too Fast; Downgrade to Underperform

Event

  • We are downgrading TWTR from Neutral to Underperform. We believe nothing has changed in the fundamentals to justify the sharp rise in shares over the past few weeks.

Impact

The Bottom LineWe expect this to be among the shortest downgrade note you’ve ever read, as nothing fundamentally has changed since our Neutral initiation on Dec. 11, except that shares have risen 40%. When we launched on TWTR 15 days ago, we laid out pros and cons and stated that TWTR was worth $46/share. Since that time, on the back of virtually no new news, the stock has risen in value 40% (vs. 2% for the S&P 500). Since the IPO open on 11/7, TWTR shares are up 62% (vs. a 4% gain for the S&P 500). We continue to believe that Twitter as a company has a bright future and many opportunities ahead. However, as a stock, we believe nothing has changed over the last 15 days to justify the rise in valuation. Therefore, we are reducing our rating to Underperform, from Neutral, and maintaining our estimates and $46 target price. In addition to our initiation comments we highlight the following key points:

1)    Estimate differences between underwriters and others could limit upside to consensus. By far, the point from our initiation that received the most attention is the table noting the wide difference in underwriters and non-underwriters’ rev. estimates (15% lower in ’14, ~30% in ’15). Because the high-profile TWTR had a relatively small amount of underwriters, it led to a unique situation of more than a dozen banks launching coverage without receiving guidance or speaking in any real detail w/mgmt. Below-the-line items such as taxes and share count also have wide discrepancies.

2)    Many opportunities, but will take time and additional headcount: While we are quite bullish on TWTR’s potential, we highlight that it takes time and people to execute against opportunities. TWTR has less than half the number of employees as FB and just 5% of GOOG’s (even excluding MOT).

3)    Other downgrades to come? Finally, we note that because of TWTR’s run and rules around price targets, we expect many other analysts will quickly have to either justify raising targets (based on little new information) or downgrade.

Earnings and target price revision

  • No change.

Price catalyst

  • 12-month price target: US$46.00 based on a PER methodology.

  • Catalyst: New ad products and services; 4Q’13 earnings

Action and recommendation

  • Downgrade from Neutral to Underperform.

Analyst(s)
Macquarie Capital (USA) Inc.
Ben Schachter
+1 212 231 0644
ben.schachter@macquarie.com

Tom White
+1 212 231 0643
tom.white@macquarie.com

John Merrick
+1 212 231 6598
john.merrick@macquarie.com

27 December 2013

TWTR US

Underperform

Price (at 05:00, 24 Dec 2013 GMT)

US$69.96

Valuation

US$

46.00

- DCF (WACC 9.0%, TGR 3.0%)

12-month target

US$

46.00

12-month TSR

%

-34.2

GICS sector

Software & Services

Market cap

US$m

38,107

30-day avg turnover

US$m

954.7

Number shares on issue

m

544.7


Investment fundamentals

Year end 31 Dec

 

2012A

2013E

2014E

2015E

Revenue

m

316.9

629.6

1,051.8

1,481.7

EBIT

m

-32.7

-42.2

-17.7

63.8

EPS adj

US$

-0.30

-0.37

-0.02

0.05

EPS adj growth

%

52.7

-21.3

95.8

nmf

PER adj

x

nmf

nmf

nmf

1,279.1

EV/EBITDA

x

373.5

149.0

348.6

175.8


TWTR US vs S&P 500, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Capital (USA), December 2013

(all figures in USD unless noted)


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