Wells Fargo Hits Twitter with the Downgrade Stick

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Shares of Twitter (NYSE:TWTR) fell as much as 4 percent on Monday afternoon following news that Wells Fargo cut its rating on the stock from Market Perform to Underperform with a price target in a range between $36 and $39. Echoing the concerns of other analysts with a bearish outlook on the stock, analyst Peter Stabler cited high valuation, over-inflated investor expectations, and underlying risks as reasons for the downgrade.

“Though we believe Twitter has emerged as a leading social communication channel, and is likely to continue a rapid release of improved advertising products and measurement capabilities, we believe investors underestimate some challenges facing the company and advertisers seeking to employ the platform,” Stabler wrote in a note seen by Street Insider.

Stabler cites several specific challenges. First, he highlights the issue of engagement, which is pretty much the lifeblood of Twitter’s business. A user is only truly valuable to the platform if that person is engaged. Twitter only really makes money from users who see or click on advertisements, though it does pull in some revenue from data licensing — about 11.2 percent of its total in the nine months ended September 30 — but this share is expected to decrease in the future.

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