Twitter could lose advertising tug-of-war

Firm poorly positioned relative to peers as advertising shrinks

Investors shouldn’t believe everything they read on social media or, for that matter, about social media.

Take Twitter’s encouraging first quarter results that extended the recent rebound in its share price. They were in fact a mixed bag, including more “monetizable users” but less monetization.

The social-media company has proven to be a valuable news source amid the coronavirus pandemic, growing its measure of daily users by a hefty 24% year over year.

But the company also said revenue growth slowed to 3% year over year from 18% in the same period last year.

That slowdown contributed to the company’s first net loss since the third quarter of 2017.

The headline numbers didn’t come as much surprise to investors, and actually were better than Twitter had warned. Back in March, the company said it expected first quarter revenue to decline on a yearover-year basis.

It also said it expected to swing to an operating loss even as it added users. Twitter’s share price, like that of its peers, sold off from mid-February to midMarch and has recovered significantly since.

It rose by another 8% in premarket trading on Thursday after the report.

But resilience in ad spending won’t be seen in equal measure across all social platforms.

Although concrete guidance for the year doesn’t appear to be coming sector-wide, Twitter’s peers have given investors glimmers of hope.

Facebook, for example, on Wednesday said that, while it saw significant declines in ad demand in March, it also saw demand stabilize in the first few weeks of April.

Based on Pinterest’s preliminary results—it officially reports next week—Twitter’s meager first-quarter sales growth relative to its peers suggests it could be among the first on the chopping block as advertisers look to cut spending in an increasingly tough economic environment.

Twitter is at a disadvantage in the ad game right now, given its heavy exposure to brand versus direct advertising.

While direct advertising encourages immediate conversion, brand advertising elicits longer-term consumer sentiment and is therefore more likely to be axed with declining budgets.

Chief Financial Officer Ned Segal said the company is working with “urgency” to add more direct-response ad formats to its platform.

Another negative factor is that many of Twitter’s ads revolve around product launches and live events—the 2020 Olympics, for example—which have been postponed. Mizuho Americas analyst James Lee estimates that Twitter’s growth rate won’t return to normal until the second half of next year, since live events will likely take longer to recover than other promotional opportunities.

Stifel analyst John Egbert said this week that the geographic mix of Twitter’s users also could hamper a near-term rebound in revenue growth. Roughly 80% of Twitter’s users are international, while the majority of its revenue comes from U.S. users.

Twitter’s content may feed the thirst for hope, but investors can’t afford to bet on it.

Twitter has proven to be a valuable news source amid the coronavirus pandemic