JEFFERIES: Twitter's 'strong brand' isn't enough (TWTR)

jack dorsey

Everyone has heard of Twitter these days, especially since President Donald Trump has made it his preferred platform. But, the "strong brand" of Twitter isn't enough for one Wall Street bank.

In a note to clients sent out on Friday, Jefferies downgraded Twitter from "buy" to "neutral," while lowering its price target from $20 to $16.

"Twitter's global platform has broad user engagement, but monetization is slipping," analyst Brenth Thill wrote. "In social we see a clear winner in FB. Investor debate is focused on Twitter's ability to reverse its -6% year over year revenue decline and capture additional share of the digital ad wave."

Twitter's user base has been growing at a glacial pace in recent quarters. The company added zero new monthly active users in its most recent quarter and had only 5% more users than it did the year before.

Twitter is increasing its engagement slightly though. Since Jack Dorsey returned to the helm of the company in 2015, slight changes to the platform and focus on "live" have made those already on the platform more likely to log in each day, Thill said.

The company's brand, while strong, has failed to please advertisers. The return on investment from buying ads on Twitter's platform has been disappointing, according to Thill. In a time where digital advertising grew 15% in the first half of the year, Twitter's advertising sank 6% because advertisers aren't getting what they want from the platform.

However, Thill doesn't think Twitter is going away.

"Investors might ask why not a sell?" Thill writes. "The stock has bounced off a low of ~$14 3x in the last 2 years and we believe recent management changes could help to improve the declining average revenue per user in the near term. We will pay close attention to advertiser sentiment over coming months and effectiveness of live video."

Other companies like Google and Facebook offer better bets on the future of video, according to Thill, and investors are better off waiting to see if new faces at the company can usher in a turnaround.

Shares of Twitter are up 1.28% this year.