Twitter User Growth Reality Check

| About: Twitter, Inc. (TWTR)
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One of the first articles I wrote about Twitter (NYSE:TWTR) explained why the company definitely wouldn't be trading at $70 when Q3 2014 started, and it also reiterated my "avoid" outlook on the company heading into the new year. I wrote:

For the long-term, at this point, it would be my recommendation to not stake a position in the company with a long-term outlook. We have yet to be privy to the company's financials and we have yet to be privy to seeing how the company operates quarter over quarter and year over year. With a company this young, there is a lot to prove before becoming a vehicle for long-term investment.

To start 2014, I recommended Twitter as a good macro market hedge to take on for the year - based on the likelihood that its lofty valuation would make it a prime candidate for profit taking and liquidation if the markets got rough.

Today, after hours, Twitter had its first earnings report as a company. Analysts were expecting the company's revenues to come in around $218 million. The company beat expectations, reporting a loss of $511 million for the quarter inclusive of $243 million in revenues. The revenue, for all intents and purposes, is great news for the company. Twitter's ability to grow revenues had been in question since the company IPO'd. The company beat expectations on both lines - for all intents and purposes, it was a good report.

Twitter - like Pandora (NYSE:P), who also reported today - had the microscope on all areas of its growth, including its user growth.

So, when the company disappointed with user growth, reporting only 9 million users added in the last three months, investors got shaky knees and the stock was clipped up to 17% after hours. Heading into the end of after hours trading, Twitter is trading slightly north of $54.

Timeline views also disappointed what was expected of the company - they came in as a 7% reduction from the prior quarter. Additionally, international revenue has failed to materialize the way that analysts had hoped.

On the ensuing conference call, Twitter's CEO Dick Costolo talked about making the service easier to use. Seeking Alpha reported first on the details of the company's call:

  • Among Costolo's proposed remedies: Enabling the discovery of content based on topics, and adding more conversational features and "rich media" content. Twitter has already made some changes along these lines.
  • Concerns that Twitter's relatively steep learning curve have led to high rates of churn have been around for a while. The company ended Q4 with roughly 1/5 as many MAUs as Facebook.
  • In response to a question about the Timeline view slump, Costolo suggests the metric provides an incomplete picture of Twitter engagement, since interactions per Timeline view continue to grow. He claims retweets and favorites are up over 35% following recent UI changes.
  • Costolo and CFO Mike Gupta insist their company is just scratching the surface when it comes to ad monetization, and particularly highlighted its e-commerce opportunities. But they also insist Twitter will take a conservative approach to ad load for the sake of the user experience.

It's worth reiterating - in a skeptical market like the one we have right now, with companies whose valuations are enormous, you have to meet or beat on all metrics across the board, including guidance. Twitter failed to do this and investors are taking profits accordingly.

For the long term, my outlook on Twitter is neutral at best with the current levels that the stock trades at. Aside from short-term trades like options spreads that take advantage of how volatile Twitter trades, I see no reason to be putting "buy and hold" money into Twitter - at least until it gets a couple more quarters reported.

Disclosure: I am short P. 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.