Analyst Downgrades Twitter (TWTR); Boosts Facebook (FB) and Google (GOOG)

The shares of Twitter Inc (NYSE:TWTR) plummeted almost 4% to $66.29 per share after an analyst at Morgan Stanley lowered his stock rating for the micro blogging company citing that betting on it is riskier due to the growing competition for online advertising.

Morgan Stanley analyst, Scott Devitt reduced his recommendation for Twitter Inc (NYSE:TWTR) to underweight, which is equivalent to a sell rating. The analyst previously had an equal weight rating for the stock.

Despite the slump, the stock price of the micro blogging company is still 146% higher than its $26 per share initial public offering (IPO) price. The analyst has a price target of $33 for Twitter’s stock

Twitter’s success far from guaranteed

In a note to investors, Devitt emphasized that Twitter Inc (NYSE:TWTR) is a “compelling” platform for social networking, but he thinks the company is at risk of remaining a “niche product,” and it would be difficult for it to expand to a broader, money generating audience.

According to him, one of the challenges confronting Twitter Inc (NYSE:TWTR) is the strong competition for advertising revenue online, and advertisers are likely to allocate their advertising budget towards bigger and more established social network platforms.

Devitt noted that the worldwide advertising revenue of the micro blogging site represents only 6% of the “socially enabled” ads worth $10.3 billion while the social network giant accounts 66%.  He estimated that the market share of Twitter Inc (NYSE:TWTR) in socially enabled ads will increase to 10% over the next four years, but the social network giant will still hold its 66% market share.

Despite the ease at which users can sign up for Twitter, we think it is inherently more complicated to understand how to get the most out of Twitter compared to Facebook’s service, which is easier to use,” said Devitt.  He added, “In our view, success is far from guaranteed at this early stage.”

Analyst prefers to invest in Facebook, Google

Devitt said he prefers to invest in Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:FB) even if he is comfortable with the Twitter’s risk/reward closer to his $33 price target. The analysts emphasized that the social network giant and search engine giant have significant advantages.

According to him, Facebook is the “best way to play social network.” He has an overweight rating with a $62 price target for the shares of the social network giant. According to him, he included Instagram’s $1 billion potential advertising revenue contribution to Facebook by 2024.

On the other hand, he said YouTube is still Google’s “most under appreciated asset.” He maintained his overweight rating for the shares of the search engine giant and raised his price target to $1,172 per share.