Bernstein upgrades Twitter, despite coronavirus hit to ad revenue

• Though Twitter's advertising is taking a tough hit in the near term, Bernstein analysts upgraded Twitter to "market-perform" Wednesday. 
• Twitter shares were up more than 9% Wednesday morning. 
• Engagement on Twitter is up, but that doesn't necessarily translate to monetization. "Engagement is all COVID news, and brands don't want to be associated," the analysts wrote.

Jack Dorsey, CEO of Square Inc., holds an Apple Inc. iPhone while standing outside of the New York Stock Exchange (NYSE) in New York, U.S., on Thursday, Nov. 19, 2015.

Yana Paskova | Bloomberg | Getty Images

Though Twitter's advertising is taking a tough hit in the near term, Bernstein analysts upgraded Twitter to "market-perform" Wednesday. 

Twitter shares were up more than 9% Wednesday. 

The upgrade comes as Bernstein's Mark Shmulik and Nikhil Devnan say Twitter's stock has underperformed in the COVID sell-off and that the valuation is now more reasonable. They wrote that Twitter is sitting at the center of news and conversation during the pandemic and that events — which Twitter gains significant amounts of revenue from — are postponed but not lost.

They write that they also see "signs of life" from Twitter's Mobile Application Promotion, or MAP, suite of products that help advertisers promote mobile apps on the platform, including app installs, conversions or engagements on apps. Twitter blamed its third-quarter 2019 earnings whiff on the top and bottom lines in part on issues with MAP. Also, analysts said they believe Elliott Management and Silver Lake will serve as catalysts for the ability to increase the cadence of innovation, specifically in ad product. Silver Lake invested $1 billion in Twitter after Elliott took a large position in the company and made a failed attempt to oust CEO Jack Dorsey earlier this year.

But things will be difficult in the near term. Twitter two weeks ago pulled its first-quarter guidance due to the impact of the COVID-19 pandemic, blaming the virus for causing a slowdown in advertising. 

Users are up, the company said, reporting that its quarter-to-date average of monetizable daily active users had reached 164 million, up 23% from its fiscal first quarter in 2019 and up 8% from its fourth quarter in 2019. But that isn't translating to monetization. 

"Engagement is all COVID news, and brands don't want to be associated," analysts wrote. Ad budgets are also getting cut "significantly," they said. 

Tough environment for advertising 

As consumers keep up with the world's biggest story, users are spending more time online, meaning there is more ad inventory available. But with advertisers pulling back on spending, Bernstein analysts said ad prices have declined 20% to 40%. Twitter is struggling to fill the supply side, resulting in "poor ads which further decrease ad engagement," they wrote.  

Also, some advertisers just don't want to appear next to coronavirus content.

"It's one thing to advertise alongside the highlights of a game-winning NCAA basketball shot, it's quite another to appear next to a mortality rate projection," Bernstein analysts wrote. 

One bright spot is that some advertisers are spending more on digital as they're forced to close physical stores. 

"To support eCommerce growth, there's very few platforms (TWTR, FB, YouTube) to drive awareness near the top of the funnel, and TWTR seems to be benefiting from this position," they said. 

It's unclear whether users stick around post-COVID, but if they do, it bodes well for Twitter's "medium-to-long term recovery story as ad dollars start to come back," the analysts said. 

Events revenue

Delayed movie releases, suspended sports and the postponement of the Olympics are another knock on Twitter's near-term ad revenue. 

"These are critical sources of revenue for the platform as shown by the recent success of the Super Bowl tailwind where 40 out of the 41 non-political TV advertisers also spent on TWTR this year," the analysts wrote. 

But some studios are shifting up timetables for home rental or streaming launches, analysts wrote, including Disney's "Onward," and NBCUniversal made some movies available to watch from home while they were still in cinemas. Pair those with Quibi's launch, and analysts said Twitter is seeing new advertisers and ad dollars shifting to support digital content releases. 

"The major question is what happens to the ad dollars committed in upfronts to specific sporting and global events," they wrote. "Our best guess is that most dollars will stay on TWTR once the events do take place, and if anything, TWTR may see a bump on engagement if the first events back are played behind closed doors and public viewing venues remain shut."