Twitter Inc. reported weak user growth in the last quarter, giving pause to investors who had given the social media company a stock market value of more than $35-billion (U.S.) in the belief that its meteoric ascent would continue.
In its first earnings report as a public company, Twitter beat analysts’ expectations on revenue, but fell short on its monthly count of active users, which averaged 241 million in the fourth quarter, up just 3.8 per cent from the previous quarter.
As a company whose business model is based on selling advertising messages for a mass market of Twitter users, a slowing growth rate is of huge concern to the market. Twitter’s stock fell 17 per cent in after-hours trading to $54.41.
“The concern is that if they don’t grow the user base as much as people anticipate, their mobile advertising revenue will miss its target,” said Ronald Gruia, a director at consulting firm Frost & Sullivan. “It makes it more difficult for them to monetize.”
The quarterly results marked a big test of Twitter’s elevated share price.
Since the November initial public offering, which raised $2.1-billion, an investor frenzy had pushed Twitter’s stock up more than 150 per cent, with little news to justify the price spike.
The microblogging site has already established itself as a major player in the social media space, but Twitter’s fate will rely on its ability to sustainably earn money off that popularity.
Facebook Inc., while still a highly speculative stock, is showing some indications of its potential to generate future earnings. Last week, Facebook beat analysts’ expectations for both revenue and earnings in the fourth quarter. Crucially, Facebook is showing promising trends in mobile engagement and mobile ad revenue, which analysts say are essential to the company’s staying power as users turn to smartphones and tablets in place of desktop computers.
According to Thomson Reuters, analysts were anticipating a loss at Twitter of about 2 cents a share, on an adjusted basis, and revenue of $218-million. The company surpassed both measures with a 2-cent adjusted profit per share and revenue of $243-million.
But most of Twitter’s shareholders are far more interested in the prospect of future growth than immediate profitability. The company is following what has become an industry-standard model of first establishing a vast user base, from which to wring endless profits later on.
Putting a dollar value on a company with such an uncertain financial outlook is practically anyone’s guess. That’s one reason why the stock trades with such volatility, having debuted at $26, then rising to almost $75 around Christmas, before settling at about $66 before Wednesday’s after-hours earnings announcement.
With such a speculative premium built into a stock that investors have had only three months to familiarize themselves with, any disappointment was bound to bear heavily on the stock, Mr. Gruia said.
“It’s a brand new stock and people are still trying to figure this out,” he said. “A lot of people think they needed to pull a Facebook – fire on all cylinders.”
“What this report will do is it will question how mainstream is Twitter as a platform,” said Arvind Bhatia, an analyst at Sterne, Agee & Leach. “Both in the U.S. and internationally, the monthly active user base did not grow as fast as people thought, and that has an impact on the number of timeline views.”
Timeline views dropped sharply from 159 billion to 148 billion in the quarter, signalling that users were refreshing their Twitter accounts less often.
The company explained that result as an effect of product improvement. “Some product changes could result in short-term fluctuations in some of our operational metrics, particular timeline views,” Twitter CEO Dick Costolo said in a conference call. He described timeline views “as a kind of a proxy for the amount of content our users consume.”
Mr. Costolo did not directly address analyst concerns regarding soft user growth, but did say that “combined changes over the course of the year would start to change slope of the growth curve.”
With files from Reuters