Twitter's Numbers Game

| About: Twitter, Inc. (TWTR)


Twitter hasn't been able to deliver decent price returns so far despite the last quarter results being higher than what analysts expected.

While falling active user growth is a sign of worry, fewer active users as a share of total registrations is an even greater worrying statistic to look at.

The company is making future promises through acquisitions and pushing more engagements but until something solid appears the stock remains a risky investment.

Twitter's (NYSE:TWTR) stock was penalized by the market after its first post IPO earnings disclosure last February when investors saw poor growth results in the number of active users on the site. The shares hit a peak of $74.73 in December and investors thought that the social media platform could become as successful as Facebook (NASDAQ:FB) but to date the company has delivered a price return of just 1.85% since its IPO.

This reflects the shaking confidence in the company's ability to stay ahead. In this article, we will be looking at what really happened in Twitter's first post IPO earnings and analyze the figures involved. We will then see what prospects the company offers to its investors for the upcoming future.

Post IPO Quarter

During the first quarter of the public company, Twitter's sales jumped up to $243 million reflecting a 116% increase compared to the same period in 2012. Out of this, ad revenue made up $220 million rising at a greater rate of 121% and was partly explained by the strong holiday season and higher ad revenue per timeline view. Ad revenue per 1,000 timeline views reached $1.49 last quarter reflecting an increase of 76% from the prior year.

The company promoted its achievement by claiming that it holds the potential to attract further audiences. User interaction in the form of favorites and retweets was up by more than 35% after Twitter brought its content forward and pushed the framework of the language to the background. Other recent changes like putting direct messaging front and centre in mobile apps on iOS and Android resulted in higher interactions with messaging rising more than 25% since the change. Search results also grew by 120% year over year.

While these were all praiseworthy notes, the most damaging figure was the weak user growth. Monthly users averaged 241 million which was a small 3.8% increase from the previous quarter. The rate was the lowest since Twitter began revealing its user figures. Previously, the company's growth had been at 10%, 7% and 6% during the first three quarters of 2013 respectively; so the lowest ever increase just after the IPO was definitely a number that would hurt investors' sentiment.

Even though the low growth was painful, I would like to bring more aching detail to your attention. Remember how the CEO declined to comment on how many users try Twitter and then abandon it because they don't like it? For investors, this should be a more important figure than just looking at total user growth. According to Twopchart, the company presently has 970 million registered users (see table below).

Source: Twopcharts

Compare this to the 241 million active user figure I talked about above. Yes, that's just 24.85% of total sign ups. Nearly 1 billion people have tried Twitter but currently only a quarter of them actually log in once a month. That's not a good statistic because this figure is shrinking. Last November, the ratio stood at 26.27% and now it's below 25%.

To make matters worse, the company defines monthly active users (MAU) as someone who simply logged in during the month. This includes all those people who use Twitter solely to follow their favorite people from whom they want to hear and read their tweets without writing anything for themselves. This in reality lowers engagement but Twitter still pushes to include these people within their count.

These facts didn't matter much as they were hidden under the diluted EPS figure of $0.02 Twitter gave well above the negative $0.02 analysts were expecting. Now the company is acquiring TV analytics specialist firms Mesagraph and SecondSync to pave the way for more investor returns.

Mesagraph runs an online platform called Meaningly that allows user to access relevant insights for specific topics based on what's being tweeted live. The company's TV API then builds upon that by proposing custom streams and analytics that surround live TV shows. SecondSync is also similar as it analyzes social media discussions about TV shows and will give Twitter a related skill set for its mounting TV goals.

Twitter will be utilizing this know-how to improve its tweeting platform. Another important reason is that the Mesagraph partnership with French TV networks such as M6 and TF1 are the broadcasters the company wants to target with its ad service and its Amplify program that gives brands the ability to publish clips between tweets and other limited content.

Bottom Line

While there are other events occurring that I haven't really discussed, the point should be clear: Twitter will find it hard to snatch away revenue share from its biggest rival Facebook no matter how hard it pushes to improve user engagement. While the company's three year average revenue growth stands at 186% that is a lot higher than the industry's. I wouldn't place my money on what the social site "plans" to deliver. The stock remains risky, therefore, I recommend selling the stock.

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.

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