While Pinterest's fundamentals were called "solid," Twitter is seen being at a "bit of a crossroads"
Shares of social media stocks are in focus on Friday after Wells Fargo raised its rating on Pinterest (PINS), noting material underperformance in the shares despite solid fundamentals and audience engagement. Meanwhile, UBS upgraded Snap (SNAP), saying the company exited 2019 with positive momentum in ad revenue as well as user growth, but downgraded Twitter (TWTR), saying it is entering 2020 at a "bit of a crossroads."
PINTEREST'S FUNDAMENTALS 'SOLID': Wells Fargo analyst Brian Fitzgerald upgraded Pinterest to Overweight from Equal Weight with a price target of $30, up from $28. The shares have "materially underperformed" the broader market since the April 2019 initial public offering even though the company's fundamentals "remain on solid footing," Fitzgerald told investors in a research note. He added that Pinterest has delivered generally solid results, handily exceeding pre-IPO targets with healthy audience and engagement growth, strong revenue growth and solid progress toward profitability. Fitzgerald said he sees several catalysts down the road, including gains in engagement, ongoing platform optimization and more video on the platform. The analyst further stated that following the third quarter results, he thinks sell-side expectations have been reset to "more realistic [and likely exceedable] levels."
The Wells Fargo analyst noted that Pinterest's average revenue per user in the U.S. was 22.5 times what it was internationally in the third quarter, compared to 3.6 times for Snap, 4.6 times for Twitter and 6.9 times for Facebook (FB). He added that Pinterest's audience is comprised of over 300M monthly active users, and said large brand advertisers have embraced Pinterest as a "welcome alternative" to the online advertising duopoly of Facebook and Google. He sees continued revenue growth runway for Pinterest, fueled by audience and engagement growth, increased prioritization of international monetization and increasing penetration of large brand advertiser budgets.
SNAP EXITED 2019 WITH POSITIVE MOMENTUM: Meanwhile, UBS analyst Eric Sheridan upgraded fellow social media stock Snap to Buy from Neutral with a price target of $24, up from $16. The analyst told investors in a research note of his own that Snap exited 2019 with positive momentum in ad revenue as well as user growth, and that he expects that momentum to be sustained this year. While the stock is up 21% over the past month, Sheridan said he sees a renewed management team focused on driving a mix of user growth, particularly the Android refresh, and ad monetization that could produce multi-year revenue growth even above his forecasts.
Sheridan noted that industry data is showing solid momentum for ad budget allocation and potential tailwinds for pricing on Snap's Snapchat platform over the medium term. According to data from the firm's Evidence Lab Social Media survey of roughly 2,000 U.S. internet users, Snap is seeing strong year-over-year growth in usage, particularly outside of its core demographic, and ad conversion. At the same time, Sheridan said industry checks point to solid momentum for ad budget allocation and potential tailwinds for pricing on Snap's platform over the medium term. Snap remains an under-monetized platform against solid user growth and engagement and recent momentum with respect to ad budget allocations into 2020, the analyst contended.
Wells Fargo analyst Brian Fitzgerald raised his price target for Snap to $20 from $16 to reflect higher peer multiples as well as higher long-term revenue growth and EBITDA margin expansion forecasts.
TWITTER AT 'CROSSROADS': While becoming more bullish on Snap shares, UBS' Sheridan downgraded Twitter to Neutral from Buy with a price target of $35, down from $37. He told investors that Twitter has entered 2020 at a "bit of a crossroads." Twitter's investments in 2020 will act as a headwind and "cap" the valuation, he contended, and said he continues to hear from industry contacts that 2020 should be a year where Twitter's platform is set to capitalize on large scale global events, like the Olympics, European football championship and U.S. election. However, exiting from its "buggy" summer, Twitter management also is likely to persist with investments around safety, security and ad tech stack, added Sheridan.
The analyst said he needs a "number" of key debates to be resolved in order to become more bullish or bearish on the stock. He noted that questions remain over scale of user base and engagement in the coming years, and said Twitter remains a platform that has experienced an advertising rebound on the back of brand/video ad dollars in the past two years and a broadening of advertiser depth is necessary to sustain 20%+ topline growth. Lastly, Sheridan said Twitter's long-term margin structure of mid-40% adjusted EBITDA margin, if achieved, would make the valuation more compelling but he thinks that any sustained investments will call into question the viability or timeline for that goal.
PRICE ACTION: In morning trading, shares of Pinterest gained 1.7% to $23.33 and Snap rose 5% to $19.16. Twitter fell fractionally to $34.08.
Keywords: analyst, commentary, upgrade, downgrade, price target, social media