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Why Morgan Stanley has downgraded Twitter

by James Poulter on Jan 07, 2014 at 13:51

Why Morgan Stanley has downgraded Twitter

Morgan Stanley has downgraded popular social media company Twitter to underweight over advertising revenue fears, prompting a 3.9% drop in the stock on Monday.

Twitter shares have been flying over the past two months as investor faith in the social media giant’s ability to expand its share of the online advertising market has grown.

But this faith may be misplaced according to Morgan Stanley analyst Scott Devitt. In a note to investors, Devitt wrote: ‘Twitter currently trades at a premium to peers and is above our bull case, which assumes that brands will strongly embrace Twitter’s Amplify TV tie-in product.’

‘However, as the competition for online ad revenue intensifies, we see TV ad budgets as most likely to go to the largest distribution platforms such as YouTube and Facebook first, and then later to smaller platforms including Twitter’, he continued.

Morgan Stanley has set a price target of $33 a share, within a range of $61 to $18 dollars.

The firm is yet to make a profit but has still got investors in a flap. The stock price has risen more than 155% since its November IPO price of $26, closing yesterday at $66.29.

In Morgan Stanley’s view there is a risk users will stop flocking to the San-Francisco based website and it will remain a niche product due to its complexity in comparison to Facebook.

As the chart below shows significantly more Twitter users also use Facebook than vice-versa.

Macquarie downgraded the stock last month in what analyst Ben Schachter described as ‘the shortest downgrade note you’ve ever read,’ maintaining a $46 target price.

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