Twitter delivered a giant Q3 earnings miss last Tuesday evening and shares tumbled 13% the rest of the week.

Interestingly, Cathie Wood's ARK Invest funds bought about 450,000 shares of TWTR on the Friday before (October 22) around the 50-day moving average at $63, resulting in an open loss on October 29 of roughly $4.2 million.

But wait, there's more. On the day of earnings (before being reported that evening) her firm added 1.05 million shares around $62. That chunky buy stood at an open loss of $8.88 million last Friday..

And then on Oct 27 during the 10% exodus, ARK bought another 1.1 million shares. This is one of the great things about Wood's active ETF transparency. We get to see all trades, every day, and that is as good a view of real-time fund manager conviction as you will ever get.

One Analyst Who Got It Right

In this article, I will share the views and moves of many investment bank analysts who found themselves reversing their Twitter bullishness from earlier this year. But first, let's hear from one who got it right all along.

Barclays analyst Ross Sandler raised the firm's price target on Twitter to $64 from $60 after the company report, but maintained an Underweight rating on the shares. Noting that the Q3 results "were solid in the face of industry disruption" he still remains cautious with TWTR trading at 8 times revenue with margin contraction ahead. Sandler observed that "a lot of the good news is already priced in."

To highlight the continued optimism of Sandler's peers, I'll share some comments from Bernstein analyst Mark Shmulik who said that while the Q3 print didn't meet his elevated expectations, missing slightly on both revenues and users, it did meet consensus numbers.

What about the 400% miss on EPS, delivering a loss of 54-cents vs. a consensus profit of 16-cents? And this may prove to be the most perplexing observation of this earnings season...

"Twitter's stock has been in the penalty box after posting two disappointing quarters following a strong investor day," the analyst noted. With this starting point in mind, and some "messy prints across the sector," he believes delivering in-line numbers and an in-line guide constitutes a "clean quarter."

Clean quarter maybe, but ultra cloudy outlook. After TWTR soared to $80 in February, the following two quarterly reports were predicting more weakness ahead. Call that the penalty box if you want, but now Jack's been ejected from the game after the EPS miss forced revisions to move the profit consensus for this year down 58.5% from $0.94 to $0.39.

To the Bernstein analyst's credit, Shmulik expected Twitter to be more protected from Apple's (AAPL Quick QuoteAAPL - Free Report) IDFA (ID for Advertisers) headwinds given the 85% skew toward brand advertising, and his view was confirmed.

Apple rocked the ad-tech (advertising technology) space earlier this year when they proposed changes to the way web, social media, and e-commerce users could be tracked on their devices. But since Twitter is only doing about 15% direct response ad tracking, they are not in nearly as much trouble as other models that use 3rd party IDs.

According to Converge Tech Media "Apple's new IDFA opt-in rules will require developers to ask iPhone and iPad users for their permission BEFORE gathering data and track them across various mobile apps and websites, as opposed to merely notifying them, and giving them the option to opt out of data collection and tracking later."

The direct impacts of this are as close as the meltdown in Snap (SNAP Quick QuoteSNAP - Free Report) shares two weeks ago. On Friday Oct 22, when the owner of Snapchat reported earnings, they cited this new rule change as impacting its advertising business substantially. SNAP plummeted over 26% on enormous "get me out" volume of 150 million shares that day and were down another 5% last week.

Plus, SNAP blamed ongoing macroeconomic effects of the global pandemic leading to fewer advertisers who face a variety of supply chain interruptions and labor shortages. The logical connection there is that those industries with trade and labor constraints will reduce their short-term appetite to generate additional customer demand through advertising.

Luckily for Twitter, they have found ways to take advantage of the way the platform is structured and functions for brands to avoid Apple's wrath -- and the supply-chain train-wreck. More on that coming up.

But the TWTR team says it has "so much more work to do" here in terms of machine learning algos that can get marketers in the green.

Meta Social Space

Last week's biggest social media platform news was probably the corporate renaming of Facebook to Meta. I get what Zuck is trying to build, but this is coming from a guy who gave us "Hot or Not" and political disinformation on steroids, without any remorse.

He built a digital advertising juggernaut funneling hundreds of billions in annual commerce with laser-beam customer targeting. And how the Metaverse will facilitate that with AR/VR/AI tools is interesting, if not intriguing.

With the entrenched loyalty of over one billion of Facebook users clicking on targeted ads, they can afford to experiment and probably still hit a record $150 billion in revenues (mostly from advertising) next year.

As perennial "walled gardens," both Facebook and Alphabet (GOOGL Quick QuoteGOOGL - Free Report) will continue to harvest ad dollars from their enormous peasant populations, massive data collection, and innovative consumer tracking.

But I'd rather have real conversations with real people about their business, knowledge, expertise, skills, education, and life goals. And I will bet real money that you are much more likely to find your next job, gig, business partner, angel/VC funding, or even spouse on Twitter than on Metabook.

That's why I love the Twitter platform and what has been and continues to be possible there. For years, I have been singing the praises of its unique structure and functionality to build what I call thousands of "communities of knowledge."

I have met and interacted with some amazing people who have impacted my life and work. I expect that to also persist and grow.

I'm also impressed with how Jack & Co. have been able to monetize the platform. And truth be told, I'm probably still sore I didn't see that coming when I was looking at the stock as tempting at $28 in 2018.

Now I'm looking at buying TWTR soon as this latest round of tempered expectations gets discounted, and the stock trades at just 7X revenues. Maybe we'll even get some chances under $50.

One of my positive catalysts is the vision that Jack Dorsey and CFO Ned Segal maintain for the brand as they try to unlock its revenue potential.

For instance, they introduced the Topics feature sometime this year (or last) but I just recently found its value. While for years I was just scratching the surface of people I wanted to follow in certain industries and with specific expertise, choosing relevant Topics brought a whole new flood of smart, generous folks into my feed.

Twitter Spaces > Metabook Metaverse

Another new feature on Twitter is Spaces, an audio chatroom where a host can invite a few guests to discuss a topic and anyone can listen in. I was lucky on the morning after Twitter's report to see at the top of my mobile feed the chance to hear CFO Ned Segal get interviewed by Bill Brewster @BillBrewsterTBB, host of The Business Brew podcast.

Bill also had notified several independent equity analysts and investors to also ask questions on the Space (most probably too small to get access on the earnings conference call).

One question that kept popping up in endless forms was about Twitter's favorite new business metric mDAU, or monetizable daily active users.

To see why this issue is important to analysts and investors, just consider how the CEO highlighted it in his earnings statement...

"I am proud of our third quarter results. We're improving personalization, facilitating conversation, delivering relevant news, and finding new ways to help people get paid on Twitter. Average monetizable DAU reached 211 million, up 13% year over year in Q3, accelerating from 11% year over year growth in Q2, driven by ongoing product improvements and global conversation around current events."

Tied into that mDAU is the real pay dirt: Twitter reported Q3 advertising revenue of $1.14B, up 41% year-over-year. But maybe the analysts and investors are worried that the US is such a small percentage of that growth with average US mDAU at 37 million for Q3, compared to 36 million in the year-ago period and flat sequentially.

Meet Ned in Space

As mentioned, I attended Wednesday morning's Space chat with the CFO, Ned Segal. And I was amazed and humbled at how super "chill under pressure" the guy was in the face of annoying analysts who kept trying to get him to parse his KPIs for the mDAU metric.

Part of the focus is understandable since Jack and Ned have an mDAU goal of 315 million in 2023 -- not to mention doubling 2020 revenues to $7 billion. So exactly how they are making progress with flat US growth is a valid question.  

But when analysts troll for an answer they know the company doesn't want to disclose, it's almost as if they are trying to get management to slip up and say something they weren't supposed to, leading to new "shadow" metrics.

A company can use a metric however they wish if it fits the long-term vision for their brand's monetization. Think how long we've waited for Amazon, Google, or Apple to breakout certain line items on their actual income statements.

Segal is a model for any corporate executive doing media interviews. He just naturally calms the room -- and the fire-breathers -- by never getting defensive or frustrated and just explaining his goals while trying to answer the questions.

I also saw his CNBC Squawk Box interview from Wednesday morning and found this quote about the Apple IDFA changes very powerful...

"I think we see opportunity where others see risk. This levels the playing field and it means we're all working under a new environment and as advertisers and agencies adapt, we see opportunity to make ads on Twitter more relevant, not less relevant."

He also emphasized how global supply chain constraints don't hit Twitter as hard since 50% of revenues come from services, software and digital product advertisers.

And this is where platform functionality helps Twitter win. On the Space call, Ned said they already had 12,000 Topics and were adding more! This is how people find their "communities of knowledge."

Business Profiles are in beta and this isn't an attempt to copy LinkedIn as digital resume proxy. It's about letting business owners and marketers get their shingle in front of their people and get more opportunities to let followers engage their brand products and services

To learn more about some of the "communities of knowledge" I use on Twitter -- especially in business areas like SaaS, E-commerce, Venture Capital and FinTech -- check out my Cook's Kitchen video and article from last week...

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Analysts Get Nervous About the Goals

Finally, let's look at the analyst capitulations on Twitter's growth and valuation...

Canaccord analyst Maria Ripps lowered the her price target on Twitter to $72 from $78 and kept a Hold rating on the shares. The analyst noted user and revenue growth coming in roughly in line with expectations, as the impact from Apple's recent privacy changes was lighter than originally anticipated. Ripps said the platform's heightened investments and a premium valuation keeps the shares Hold rated for now in her book.

Jefferies analyst Brent Thill lowered his price target on Twitter to $70 from $80 and kept a Hold rating on the shares. While he believes "investors will be pleased" with Twitter's report of in-line Q3 revenue and its Q4 revenue growth guidance, Thill notes that U.S. users were flat sequentially, which he sees raising potential concerns about U.S. market saturation.

Thill lowered his FY22 operating income estimates by 6% to reflect guidance of mid-20% expense growth, but adds that Twitter's lower-than-expected impact from Apple's iOS privacy changes increases his conviction in Twitter growing to over $7.5B in revenue by FY23.

BMO Capital analyst Daniel Salmon lowered his price target on Twitter to $65 from $70 and keeps a Market Perform rating on the shares. The company's ad performance saw less volatility owing to brand exposure and its app business performed better than expected as MAP 2.0's development post the June 2020 ATT announcement has proven to be "prescient timing", but Twitter's 2021 expense guidance was higher than expectations, resulting in lower profit estimates.

Wells Fargo analyst Brian Fitzgerald lowered his price target on Twitter to $70 from $82 and kept an Equal Weight rating on the shares. The analyst notes that Twitter appears relatively well insulated from Apple iOS and supply chain issues that have hit peers in Q3. Fitzgerald thinks Twitter is making good progress with new products and features and is well positioned to tap into the creator economy.

But somewhat sluggish mDAU adds, mixed international monetization trends, a muted Q4 guide and the pending MoPub sale make him more cautious on management's targets to hit 315M mDAU in 2023 and double revenue from 2020 to 2023.

Wedbush analyst Ygal Arounian lowered the firm's price target on Twitter to $69 from $76 and kept a Neutral rating on the shares, noting results were particularly strong in the U.S., with international still impacted by COVID related closures in some markets.

Arounian points out that Twitter is also seeing a more muted impact from Apple's IDFA than social media peers, largely due to its more limited exposure to DR (direct response) advertising. The analyst sees Twitter as taking the right steps across user and ad products, but looks to see more proof points that users can march up toward the target, that ad products are gaining traction and are able to create a more favorable DR toolset in particular.

KeyBanc analyst Justin Patterson lowered his price target on Twitter to $70 from $81 and keeps an Overweight rating on the shares. The analyst also acknowledges he has more caution around the 2023 targets. Patterson believes bulls will point to better than feared revenue guidance and potential to gain direct response budget share.

While he agrees with that view, the analyst also acknowledges mDAU growth remains subdued and reaching 315M by Q4 2023 appears less likely. Shares still offer modest upside at these levels, but Patterson "increasingly" needs to see more progress with users and direct response to have confidence in 20%-plus annual revenue growth.

Bottom line: This is probably the most important post-earnings article on Twitter you will read. Bookmark it to keep it handy so you know what to look for next quarter -- and to help you decide where you think shares are truly on sale. I'll be a buyer inside $50 to $45, the May lows against the Jan lows.