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Twitter Inc Target Price Knocked Down Again as Firm Wrestles With User Acquisition Costs

jack dorsey twitter inc TWTR

Twitter Inc  doesn’t seem able to make its user base grow, while at the same time ad buyers are becoming increasing concerned with the engagement on the platform. That has lead to a slow down in ad buying on Twitter in recent months, and a slow down in the firm’s total sales as a result. There may be something Wall Street is missing, however.

jack dorsey twitter inc TWTR

Michael Nathanson, of Moffett Nathanson, in a report published on Monday morning, said that Twitter’s off-network ads, which allows ad buyers to take promoted Tweets and convert them into ads for other publishers, were not worth the hope that Wall Street seemed to be putting on them. They didn’t increase enough to offset the slowdown elsewhere in the third quarter and that, among other things, is very bad news for Twitter.

Slowing down Twitter

Mr. Nathanson said that though some on Wall Street are pointing to off-network ads as a way for Twitter to go in the future, there’s a problem that they don’t seem to be talking into account. Off-network ads cost a whole lot more to make, and their margin just doesn’t compare to the rest at Twitter.

Mr. Nathanson estimates that the traffic acquisition costs for those ads amounts to $41.5M. The number is up more than 1000 percent from the same quarter of 2014, when Twitter began putting the off network ads together. He reckons that the high costs are not being taken into account in the models of other research houses.

In his view that means that “it would imply that consensus adjusted EBITDA expectations are currently 10% too high from 2016 to 2018.” He knocked down his price target on Twitter shares to $29, down from $30 in his last report.

Making Twitter grow

On Monday shares in Twitter closed at $25.40. That’s below the price the firm went public at back in 2013, but still well above the lows set earlier this year in the wake of the firm’s most recent earnings report. Wall Street is now pricing a whole lot of risk into the firm’s future, and it’s just not clear whether it has a chance to grow in the years ahead.

MKM Partners Managing Director Rob Sanderson, in a report also published on Monday, said that the fair value of Twitter was at around $29, but the firm’s potential could range anywhere from $10 to $100. In his view shares in the firm are almost entirely reliant on user numbers to decide their future.

If Twitter can grow its user base, the firm is still going to need to convince Wall Street that it can make real money with its platform. If Mr. Nathanson is right and Twitter’s unique form of off-network ads simply isn’t up to scratch in terms of profitability, that’s an issue the firm may have to face down the road.

For the time being, however, Twitter is going to have to deal with user growth first. The firm has changed quite a few things about the way its platform works in order to make it a more welcoming place for users. Wall Street will be waiting with bated breath for the firm’s next user growth announcement. That won’t com, however, until well into January.

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