Twitter Tweeting Troubling Trends

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 |  About: Twitter, Inc. (TWTR)
by: Sarfaraz A. Khan

Summary

Twitter’s growth rates for monthly active users could come to a standstill.

Data on user engagement isn't encouraging.

Twitter's shares might remain under pressure until the company figures out a way to improve its two key metrics.

Twitter (NYSE:TWTR) is in trouble.

Last month, the company reported its first quarter results in which its revenues increased by 119.1% from the same quarter last year to $250.5 million.

During the conference call, Twitter's head Richard Costolo credited "increased engagement and user growth" for the company's impressive top line growth. A deeper look inside the company's quarterly filing, however, reveals some alarming trends.

Twitter is still adding millions of new users in each quarter but its growth is slowing down. In the first quarter of 2014, Twitter reported a 25% year-over-year increase in monthly active users to 255 million, a far cry from a growth of 102.9% two years ago and 47.8% one year ago.

If Twitter's monthly active user growth rate continues to drop at this pace, then this key metric could drop to zero before the end of this year. This is shown below in the red dotted line.

Click to enlarge

Similarly, Twitter has not reported any improvements in user engagement in both international and domestic markets. In the first quarter of 2014, the company's timeline views per monthly active user, which is used to measure engagement, dropped by 3% in the U.S. and 10% in the international markets from the first quarter of 2013.

Likewise, a survey conducted by the research company GlobalWebIndex, which specializes in consumer behavior, also shows that the social networking giant is struggling with declining user engagement, as measured by active usage.

GlobalWebindex has said that while Twitter and Facebook (NASDAQ:FB) are one of those websites that dominate the global social media landscape, they are finding it increasingly difficult to grow their monthly active usage. This is mainly due to the large number of competitors.

According to GlobalWebIndex, Twitter's active usage has dropped by 3% over the last six months.

Moreover, Twitter is growing considerably more quickly in the international markets than at home. This can create problems for the company as international users bring considerably less advertising revenues than domestic users.

In the first quarter, the company's number of monthly active users increased by 19% in the U.S. to 57 million and by 27% in the international markets to 198 million, from the corresponding period last year.

However, the company's advertising revenues per thousand timeline views is $3.47 in the U.S., as opposed to just 61 cents outside of the U.S.

If Twitter continues to show robust growth in the international markets and sluggishness at home, then it could slow down the growth of its advertising revenues per thousand timeline views.

In its previous quarter, the company's advertising revenues increased by 96% from a year ago to $1.44 per thousand timeline views.

Essentially, Twitter is competing for the online advertising dollars that aren't easy to come by, as this is an extremely competitive and a very crowded space. Twitter currently has around 1% of the online advertisement market which is dominated by Google (NASDAQ:GOOG),(NASDAQ:GOOGL) with a 51% share and Facebook with 11% share.

Then there are dozens of other companies that are significantly bigger and better established than Twitter such as Yahoo! (NASDAQ:YHOO), Tencent and Baidu (NASDAQ:BIDU).

Bottom line

Twitter's growth rates for monthly active users have fallen for eight consecutive quarters. If they continue going at this rate then the company's user growth could come to a standstill before the end of this year.

Moreover, the company's timeline views have fallen in the U.S. and international markets, indicating deteriorating user engagement.

The company's sluggish growth in the lucrative domestic market, as compared to international markets, can also have an adverse impact on its revenues per thousand timeline views.

Twitter's shares are down nearly 50% year to date, currently around $30.50. The company's shares could continue sliding unless it posts better numbers in terms of user growth and engagement.

The company's insiders, however, are optimistic about its future. Despite the recent expiry of the lock-up period, some of its key executives are still holding on to their Twitter shares. For instance, Ali Rowghani, the company's COO, Vijaya Gadde, Twitter's general counsel and Luca Baratta, its finance executive, continue to hold large stakes.

Notes:

Twitter's MAU Q12012 - Q12014

Twitter's MAU Q12011 - Q42013

Additional disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.