We are planning to raise our fair value estimate for the no-moat firm.
By Ali Mogharabi | 02-08-18 | 02:00 PM | Email Article

 Twitter beat all expectations on the top and bottom line and reported its first profitable quarter. While the firm did not see much growth in monthly active users, it appears that user engagement continues to increase as daily active users grew at a double-digit rate over the prior year. Higher-than-expected revenue, along with some effective cost control by management, helped the firm post a profitable quarter. Management provided first-quarter adjusted EBITDA guidance ahead of our internal estimate. We are also more optimistic regarding the firm’s ability to attract more ad dollars as engagement continues to improve. We have increased our projections and believe the firm can remain profitable for fiscal 2018 and beyond. Once we roll our model forward and take into account our higher estimates, we are planning to raise our fair value estimate to $24, from $17. Shares of the no-moat and very high uncertainty name are now trading in 3-star territory.

Ali Mogharabi is an equity analyst for Morningstar.

Twitter's fourth-quarter revenue came in at $732 million, up 2% year over year. Ad revenue increased 1% over the prior year to $644 million. Without the TellApart business, which the company no longer operates, ad revenue was up 8% year over year. While monthly active users, or MAUs, did not grow from the previous quarter, the ad revenue was up 28% sequentially, which we believe indicates the company’s ability to more effectively monetize its users. Plus, we think the higher user engagement, shown by the 12% year-over-year growth in daily active users, DAUs, is likely helping Twitter generate higher return on investment for its advertisers, resulting in advertisers coming back and/or increasing their Twitter ad dollars. In our view, the video ad format also continues to attract advertisers to the Twitter platform.

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