Twitter investors have a new worry about its ad business and the stock is getting creamed

Twitter shares are down more than 5% on Thursday, as the company's Q3 earnings report continues to leave a bad taste in investors' mouths.

There's no actual news about Twitter pressuring the stock today, said several Wall Street analysts who cover the stock. Rather, the extent of the struggles in Twitter's ad business are coming more into focus, in the wake of the initial bad news about its slowing user growth and weak revenue forecast.

One key issue is a new data point about Twitter's traffic acquisition costs that the company revealed for the first time during its earnings conference call earlier this week, said Macquarie Research analyst Ben Schachter.

Twitter noted that 13%, or $66 million, of its total ad revenue was "network revenue," which is revenue from ads that it serves on partner web sites. And of that $66 million, Twitter paid out $42 million in TAC to its partner websites.

Most analysts' financial models of Twitter's business didn't have that, said Schachter.

"That network business to me has always been what I would characterize as lower quality, because you don't really control your destiny," Schachter said. "You keep a lot lower percentage of the revenue, so it's not as interesting to investors."

The wrong ad business

Meanwhile, Thursday's Stratechery newsletter by Ben Thompson finds more causes for worry with Twitter's ad business. Thompson notes that Twitter's ad strength has traditionally been with the large, brand advertisers. But those advertisers like big audiences, and Twitter has struggled to grow its user base.

A better fit for Twitter, given the size of its audience, may be so-called direct response marketers, Thompson says.

"This…is really bad. Not only did the Twitter product stagnate for years, it seems that the company built the wrong sort of ads business as well," Thompson wrote.

But the direct response business is also problematic for Twitter, Thompson noted. When Twitter has tried to shift its emphasis to such ads in the past, its revenue took a hit, he said.

"I suspect the company quickly gave up and renewed its focus on direct sales-driven brand marketing. However, when it comes to Twitter's long-term sustainability, giving up isn't really an option: I wouldn't be surprised if Twitter is plunging back in to a heavy focus on direct response ads and it willing to take the revenue hit that will come as they figure the format out."