Nomura: Investors Finally Understand Twitter Is A ‘Niche’ Product

Twitter Twitter is finally flying. Shares of the concise social network shed more than $9 — or 22.5% — in the last month. After finally breaking a nine-day losing streak by closing up a penny Tuesday, the stock climbed more than 3% to about $31.50 in Wednesday morning trading on news that Nomura upgraded it to a buy.

“We believe that the market has now priced in the expectation that Twitter remains a niche social media product,” wrote Nomura Securities Analyst Anthony DiClemente. “We believe risk / reward is much more favorable now, given the possibility that product enhancements rejuvenate user growth.” Nomura maintained a $43 target on the stock based on a price to earnings ratio of 24x the financial firm’s 2017 earnings per share estimate of $2.19 — discounted 12% for two years of potential risk.

Last month Twitter reported that it had 255 million users at the end of the first quarter — 14 million more than it had at the start of the year. Despite the impressive recent growth, the rate hasn’t always been strong. Plus Twitter’s user base is a rounding error compared to Facebook’s 1.28 billion. Users, therefore, had been the investor focus. DiClemente explained, ”Over the last two quarters, Twitter revenue beats have been ‘usurped’ by MAU’s [monthly active users] and Timeline views being below. In fact, last quarter, Twitter beat revenue, raised 2Q, and raised FY revenue guidance, but investors cared not.”

DiClemente feels Twitter’s more than 50% year-to-date skid is largely due to market recognition — finally — that Twitter will never be as “mainstream” as Facebook. While he agrees with this notion, however, he wrote,

The Street expects Twitter to be less than 20% of the size of Facebook in three years, but if there is any traction for recent product initiatives to boost user growth, there may be upside to Street estimates. We believe that given product enhancements such as improvements to push notifications, reducing the number of steps in the mobile sign-up process, improving the Twitter recommendation engine, the launch of ‘media-forward’ products, and others, that interactions and user growth can begin to reaccelerate from lower-than-expected growth rate levels.”

While Twitter may never have as many users as Facebook, DiClemente notes that Twitter’s revenue per uses is growing at an industry leading rate and may hit $5.97 average revenue per user in 2015, matching Facebook’s 2013 rate. He also noted that “off-platform” initiatives such as Twitter’s MoPub exchange can reach more than 1 billion users.