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Twitter Dips on Ad ROI Concerns

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The beginning of 2014 has not been encouraging for Twitter (TWTR - Free Report) as share prices declined for the fourth consecutive day to close at $57.05 on Thursday. Shares have tanked almost 17% from the Jan 3 price of $69.00 following downgrades by analysts.

The most possible cause for the downgrades is the ad ROI reported by advertisers as compared to some of the other social and professional networking companies such as Facebook (FB - Free Report) and LinkedIn . Higher pricing and higher ‘cost of campaigns’ are related to the low ROI on ad spends that have led to the downgrades.

These downgrades will make it difficult for Twitter to capitalize on the expected increase in online ad spending in the years ahead. According to market research firm eMarketer, global social ad spending is expected to go up 8.9% in 2014 and 9.9% in 2015. However, the research firm expects Twitter’s share in the U.S. mobile Internet revenues to touch 3.5% in 2014 but drop to 3.4% in 2015.

Nonetheless, despite being much smaller than peers like Facebook and Google , Twitter’s frequent product launches are expected to help increase user engagement. The company has approximately 230 million global monthly active users.

The company’s recently announced products such as Tailored Audience, photo messaging and direct messaging are significant positives, which will help it to compete with the likes of Line, WhatsApp and Snapchat.

We believe that Twitter’s new mobile products will boost customer engagement and drive user base, which will fetch more advertising revenues, going forward. Mobile advertisement contributes approximately 70.0% of Twitter’s revenues. Moreover, we believe that the company has significant growth opportunity in international markets.

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

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