A Cautionary Tale Of Statistics, Another Look At Twitter's MAU Growth Rate

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 |  About: Twitter, Inc. (TWTR)
by: Leigh Drogen

Twitter (NYSE:TWTR) was getting absolutely butchered last night in after hours trading after reporting much better than expected earnings. Things aren't looking any better this morning either. One of the primary reasons that Estimize was founded in the first place was to provide a more representative view of the market's actual earnings expectations in situations similar to this one, where the market has much higher expectations than Wall Street. On our platform, analysts are free from several severe biases that hinder Wall Street's accuracy. But Twitter's earnings even came in ahead of our community's expectations. Investors just don't seem to care about Twitter's short-term earnings at all. The question isn't "where is Twitter now?" The question is, "where can Twitter be?"

Many traders and financial news sites commented on the bloodletting going on in aftermarket action last night and blamed the sell-off on decelerating monthly active user growth (MAU). We all told each other that was the problem last quarter when the stock plummeted on better-than-expected earnings, so why should our excuse be any different this time around?

For starters, it isn't necessarily true. Monthly active user growth rate is a relative metric dependent on which baseline you use as a point of comparison. Most of the time in finance we use year-over-year statistics. Using yoy stats is a tidy way to make sure we don't compare apples to oranges. It's obvious that Apple (NASDAQ:AAPL) will sell more iPads in the holiday season than in August, when everyone goes on vacation. Pointing out that Apple's sales drop from December to August is like saying that the sky is blue. In terms of year-over-year MAU growth, last quarter Twitter reported 30% growth and this quarter that number fell to 25%. These are the numbers that Twitter gives us in the operational highlights of its quarterly earnings report.

Here are the exact MAU numbers that everyone is having a fuss about. This quarter Twitter grew to 255 million monthly active users, a 5.8% increase from the 241 million reported in February. As a point of comparison, last quarter Twitter only reported a 3.8% quarter-over-quarter gain and this quarter marked the snap of a 4 period slide of declining MAU growth rates on qoq basis. If the raw qoq percent growth rate statistic was the only number you looked at, this would actually look like an encouraging acceleration of growth.

Adding 14 million users in a quarter isn't exactly phenomenal, but at least Twitter got the user growth rate moving in the right direction finally. And with a benchmark of less than 4% to beat, just because the MAU growth accelerated marginally does not mean that it's something worth getting excited about. Twitter still has a few major issues with the on-boarding process that it needs to solve to make the platform more friendly and attractive to new users. All too often in financial analysis we get caught up focusing on something extremely narrow like the first derivative of a relative statistic like Twitter's MAU growth, when the problems are much bigger and much more obvious.

Tech-- and specifically social media stocks-- are commonly valued off metrics like MAUs and MAU growth rate, but I have no idea what type of financial wizardry had Twitter receiving market cap valuations in the $24+ billion range. Remember, Twitter had to crush their earnings expectations this quarter just to make the breakeven point with $250 million in revenue. You still can't even give Twitter a price-to-earnings ratio but their earnings are nonexistent.

It looks like as soon as the market reopens, the little birdie is going to get its wings clipped. I know this won't give solace to any Twitter shareholders, but for what it's worth, multiple independent studies have verified the claim from our quantitative research that when a company beats the Estimize consensus on average, the stock price drifts upward over the next three trading days once the market reopens, regardless of the overnight gap whether it be up slightly or down dramatically. This is by no means a guarantee, but expect plenty of action in the market today as traders and investors scramble to figure out what Twitter shares ought to be worth going forward.

Disclosure: No positions.