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Analyst Blog

Shares of Twitter (TWTR - Analyst Report) jumped 10.69% ($3.26) to close at $33.77 on May 28, 2014, following positive comments from CEO Dick Costolo.

Recently, Twitter’s CEO expressed his optimism over the company’s growing user base. Per Costolo, Twitter’s actual user base is much higher than 255 million due to additional incidental users. Twitter’s CEO also expressed his desire to enter the banned Chinese market.

In the recently concluded first quarter of fiscal 2014, Twitter’s average monthly active users (MAU) increased 25.0% on a year-over-year basis, which slowed down from 30.0% growth rate in the year-ago quarter. Sluggish user growth is a major concern for Twitter as it can keep advertisers away from the service, thereby hurting top-line growth.

Twitter’s top line continues to be significantly dependent on ad revenues, which contributed 90.2% of total revenue in the first quarter of 2014. In such a scenario, we believe that if Twitter can successfully tap these incidental users it will help the company to attract more advertising revenues.

With an aim of attracting more advertisers to its platform, Twitter continues to enter into partnerships with the likes of Omnicom (OMC - Analyst Report), Publicis’ Starcom Mediavest Group and WPP.

Twitter’s recent deal with Omnicom, covering a span of two years, is expected to be a major growth driver. The deal deal is expected to boost Twitter’s status as an advertising platform that will further attract new advertisers.  

Twitter’s ability to attract advertising revenues, despite significant competition from Facebook (FB - Analyst Report), Weibo and market leader Google (GOOGL - Analyst Report), will be a key factor determining its growth. However, higher operating costs are expected to hurt profitability in the near term.

Currently, Twitter has a Zacks Rank # 3 (Hold).

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