Evercore Downgrades Twitter, Expects High R&D Spend Before Recovery

Twitter Inc (NYSE: TWTR) shares have fallen 35% from their 2019 high, but one team of analysts thinks things could still get worse.

Benzinga · 11/07/2019 14:25

Twitter Inc (NYSE: TWTR) shares have fallen 35% from their 2019 high, but one team of analysts thinks things could still get worse.

The Rating

Evercore ISI analysts Kevin Rippey and Benjamin Black downgraded Twitter to Underperform and reduced their price target from $42 to $25.

The Thesis

For a while, Evercore held Twitter in relatively high esteem.

“Until the 3Q, the last two years for TWTR marked one of the more impressive turn arounds in tech: user growth trends reversed declines, revenue reaccelerated, and margins rapidly expanded,” Rippey and Black wrote in a note. “Underlying this turnaround was what in hindsight appears to be a period of substantial underinvestment in ad product.”

That underinvestment is suspected to have caused technical bugs that resulted in the third-quarter revenue miss. So while Twitter bulls expect GAAP operating income (OI) margins to return to 2018 levels above 15%, Evercore isn’t so sure.

They suspect Twitter can address tech issues in the near term, but prevention of reoccurrence — and long-term revenue growth — will require R&D growth that outpaces revenue growth. Evercore anticipates compound annual R&D growth of 14.3% through 2023, an estimate that far exceeds Street forecasts but lingers below peer rates. Altogether, the rate is expected to cut GAAP OI margins from 11.2% to 10.3%.

Price Action

At time of publication, Twitter shares traded down 1.5% to $29.09.

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