Twitter’s second-quarter earnings disappoint as macro and Musk slow ad spend

Awaiting the ruling on its fierce legal battle against Elon Musk, Twitter (TWTR) reported disappointing second-quarter results, with revenue and results missing FactSet consensus estimates. While Twitter’s user base grew impressively during the quarter, the resulting higher ad inventory did not attract more advertisers or higher bids, which we believe , is mainly due to lingering questions about who will be at the helm of Twitter once the legal battles are settled. Additionally, the impact of Apple’s policies and the uncertainty surrounding the macro environment further made advertisers hesitant. With a slightly larger than expected advertiser pullback, we lowered our revenue and earnings projections, resulting in a standalone fair value estimate of $44 (lower than our previous estimate of $47) , given the significant uncertainty surrounding the potential outcome of Twitter and Musk’s legal battles.

Musk’s attempt to pull out of the deal to buy Twitter will likely force the company’s management and employees to focus more on better execution, which could lead to better numbers the rest of this year. At the same time, Musk’s request to delay the entire court process was denied, meaning the trial will begin in October 2022. In our opinion, Twitter likely has a stronger case, as we explained in our note of July 10. We also think there remains a scenario where Musk and Twitter reach a new deal at a lower cost. However, we don’t expect Twitter to settle for a new price that’s more than 25% lower than Musk’s original $54.20 offer. With shares barely trading above the levels at which Musk initially started buying, other parties may also be interested in Twitter.

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