Twitter falls on ‘challenging’ user growth outlook: Analyst

Twitter reported third quarter earnings that missed expectations. Mizuho Analyst James Lee joins Yahoo Finance Live to discuss.

Video transcript

- Let's bring in somebody who is watching both of these stocks very closely, James Lee, who is Mizuho analyst. And James, you know, we're talking about Alphabet here, but I want to start with Twitter, just given the moves we're seeing in its shares today, down about 8% on the back of its results. So why do you think investors are so down on the stock today?

JAMES LEE: Yeah, great, thanks for having me. I think the biggest factor people looking on, once we go beyond the headline number, which looks pretty OK, is the user growth. US mDAU who has been a focus for investors for a long time. People knew that Twitter has a lot of influences on the internet, but relevancy and engagements continue to be a metric that investor looking at very carefully. And if you're looking at US mDAU specifically, it was flat last quarter, it was flattish this quarter, and they guided flat to modest growth for next quarter.

So from a growth perspective, we were only looking at 3% year over year. Now, keep in mind, management set a pretty ambitious goal on growing its user base to accelerate from that 3% level that we just talked about to mid-teens over the next two years. So when investors start to look at that trajectory, specifically for FY '23, it looks a little bit challenging right now. So they still have a lot more to do, a lot more to prove on the business model.

- Yeah, I mean, they also have the ambitious goal of wanting to double annual revenue by 2023, as well. So I mean, it's tough to maybe-- when you try and calculate this, how likely it is that the company can get there to that goal if they don't see growth in terms of users? I mean, we know they're trying to build out functionality here and monetization efforts for users on the platform, but can they do that and meet doubling their sales goals here without seeing a boost to users?

JAMES LEE: Yeah, that's a good question, right? The-- to get to their 2023 revenue goal, DR or performance advertising is going to be super important. On the analyst day, they said DR makes up about 15% of the advertising revenue. By 2023, they expect that composition to move up to 50%. And the reason DR is important is, once you're able to master performance advertising, you can drive meaningful pricing leverage, similar as what we've seen in Google, and also in Facebook, as well.

And product so far, they're still developing it. It's a little bit of work in progress. I think people are disappointing they haven't really put a lot of resources developing workaround solutions for iOS, specifically, indicating maybe, you know, in terms of product development, it's a little bit work in progress. So that's another level of, you know, concern, people looking at trajectory or revenue growth, you know, above and beyond the user growth that we talked about before.

- James, let's talk about Alphabet now, the stock up about 4%. You've got a price target of $3,100, so you're almost there. 2905 is what we're looking at today. What stood out to you in the numbers that we got?

JAMES LEE: Yes. Advertising revenue is really good, three points above acceleration due to pretty strong back-to-school season and a limited impact in iOS. And a lot of benefits in advertising is really coming from what they call omnichannel, people looking to buy online and pick up at the store. They saw adoption of that channel specifically up two times last year. And also, continued mix shift on advertising from TV going to YouTube. And keep in mind, in the US right now, about 30% of the media spending is still at TV. So therefore, there's a lot of opportunity.

[INAUDIBLE] on your prior segment talked about cloud slightly missed. I think investors are focusing on the wrong number. Instead of looking at revenue number was 45%, I think once you look at the backlog number, that means [AUDIO OUT]. So cloud business, I think, from the underlying trend perspective, is actually very strong.

- Yeah, I guess, you know, when we think about how this all fits in to what we've heard from all the big tech players now this week, I mean, how would you judge maybe some of the enthusiasm you've been hearing on these earnings calls in terms of where we're at in the weight of maybe some of these supply chain issues that a lot of people wouldn't have maybe projected onto some of these tech companies? But how do you maybe factor in the real world economic consequences of where we're at in the recovery when you piece together your forecast here?

JAMES LEE: Yeah, absolutely right. People are worried about two things when it comes to advertising, impact on iOS, that is a meaningful change, and impact from rising costs of advertiser that may potentially cut advertising spending, especially on brand spending. And lastly is the supply chain shortage in supply, and how that may impact advertising specifically. And when people looking at these exposures specifically, they feel more comfortable about Alphabet, right, because search has virtually no impact on iOS.

And they were able to navigate, you know, their advertising revenue. Keep in mind, even though they have a decent exposure to e-commerce, Google also itself has a lot of exposure to services industry. Just in case people cannot find the product they are looking for, they'll start looking for either virtual items or gifts from the services industry. So think about gift certificates from hotels, restaurants, so on and so forth, where, you know, Alphabet has a very decent exposure to on the advertising business, as well.

- Yeah, Google and Android overall potential beneficiaries here on the back of a lot of advertisers maybe moving away from some of the social media platforms because of those concerns around privacy features. James Lee, Mizuho analyst, good to talk to you today. Appreciate the time.