Twitter (ticker: TWTR) reported fourth-quarter earnings on Wednesday afternoon, and the results weren’t pretty. In early trading Thursday morning TWTR stock lost as much more than 10 percent on heavy trading.
Twitter, once touted as a high-growth Silicon Valley wonder company, saw revenue grow just 1 percent from the previous year to $717 million, missing the $740 million consensus figure by a wide margin.
Adjusted earnings per share, which doesn’t factor in things like one-time expenses and stock-based compensation, came in at 16 cents, which was better than the 12 cents per share analysts expected.
Still, the bad far outweighed the good, which is why TWTR stock instantly plunged following results. It doesn’t really matter if earnings beat expectations in one quarter if your business clearly becoming less and less exciting for advertisers, Twitter’s bread and butter.
The trend is unmistakable: Revenue grew 111 percent in 2014, 58 percent in 2015 and then 14 percent in 2016. It’s not a stretch to assume that TWTR saw an election-year bump in 2016 due to all the political fireworks and President Donald Trump’s affinity for tweeting, so it’s quite possible for revenue growth to decelerate further — or disappear entirely — in 2017.
It’s not just the outside observer that sees TWTR could be in for some bleak times ahead, it’s Twitter itself. First off, the company declined to give a revenue outlook for the first quarter, which is pretty unusual.
“It is worrisome that Twitter didn’t give revenue guidance this time,” says K C Ma, professor of finance at Stetson University.
Suddenly ceasing to provide guidance for certain metrics is quite often an indication that management thinks the numbers are about to get ugly.
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Thankfully, TWTR is still providing guidance on earnings before interest, taxes, depreciation and amortization, an important metric that many analysts and investors use to get a true sense of companies’ earnings potential.
Twitter guided for EBITDA between $75 million and $95 million in the current quarter, more than 50 percent below analyst expectations.
So why is it exactly that TWTR stock — once a high-flying growth company garnering earnest comparisons to Facebook ( FB) — can’t find its way out of the gutter?
Competition is fierce. It’s starting to look like advertisers are no longer excited by Twitter, instead investing their budgets in the two giants of online advertising, Facebook and Alphabet ( GOOG, GOOGL), the parent company of Google. But FB and GOOG have been players for years, so what’s changed?
In one word: Snapchat.
Snapchat, whose parent company Snap Inc filed for an IPO last week, is quickly emerging as the up-and-coming player in digital advertising. While it’s not nearly as big as Twitter from a revenue perspective, it very well could be in just a few years. In 2016, Snap revenue exploded, surging 590 percent to $404.5 million from $58.7 million the year before.
While it’s highly likely Snapchat’s growth rate will decelerate in 2017, if it didn’t decelerate, Snap would haul in $2.79 billion — precisely the revenue figure that analysts expect from TWTR in 2017.
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Trouble growing the user base. While Twitter is still growing its user base — average monthly active users grew by 4 percent to 319 million in the fourth quarter — it’s not a growth rate to write home about, especially when Facebook, which has almost six times as many users as TWTR, is still growing MAUs by 17 percent annually.
But why is Twitter’s user base stuck growing at low single-digit rates? Eric Schiffer, a successful entrepreneur and CEO of The Patriarch Organization, a private equity firm, thinks there are two clear-cut reasons.
The first is user abuse, which is rampant and largely unchecked on the platform.
“Most people don’t want to get verbally eviscerated, and Twitter leaves anyone vulnerable to that, and there’s no one that steps up and protects you,” Schiffer says. “They haven’t figured out how to protect the average person from having a terrible experience. If this was Disneyland, they wouldn’t let people walk up to you in line and just go off on you.”
The second reason for TWTR’s struggles to grow its user base is something Schiffer likes to call the “AARP test.”
“If you’re in the AARP, do you know how to work this thing? I think it’s too complicated for most people still. When you have the president of the United States aggressively using the platform, and you’re not growing the platform, it says it’s too complicated, and it says that people aren’t safe,” Schiffer says.
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Real numbers not so flattering. Another point of concern for some investors is Twitter’s stubborn reliance on non-GAAP accounting practices to actually get into the black. While TWTR stock owners are probably pleased to see EPS of 16 cents in the first quarter, exceeding expectations, on a GAAP basis, Twitter actually lost 23 cents a share.
Hundreds of companies use non-GAAP numbers, which exclude things like one-time costs and stock-based compensation expenses, because they feel like it gives a better reflection of their true business.
But when you continually rely on these to bring you from the red to the black, it’s concerning. On $2.53 billion in revenue last year, stock-based compensation was $682.1 million, or 27 percent of revenue.
At the end of the day, there’s a lot for Twitter to fix, and TWTR stock is unlikely to be a big winner until user growth picks up and Twitter gets its expenses under control.
But Twitter’s issues stand a lower chance of getting fixed for as long as Jack Dorsey, the current CEO and co-founder, also moonlights as the CEO of the public payments company Square ( SQ).
“He is a phenomenon,” Schiffer says. “If there’s anyone that can run two companies it’d be him. But I think what we’re seeing here is there’s a limit to even a modern day Superman’s capabilities.”
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Lousy Twitter Earnings Report Highlights Long-Term Concerns for TWTR Stock originally appeared on usnews.com
