You wouldn't know it by looking at the stock price, but Twitter (NYSE:TWTR) actually beat analyst expectations on EPS and met revenue expectations with growth of 48.2% and total revenue of $710 million in the fourth quarter. Investors and Wall Street analysts seem preoccupied with the fact that monthly active users did not grow from the previous three months, and despite CEO Jack Dorsey still being a relatively new leader at the top of Twitter, there are several analysts who have already thrown in the towel on his vision. If you find yourself in this camp, the mistake will cost you.
There is this notion that Dorsey has been at the helm of Twitter long enough to create real, measurable change, and that all of the problems that have plagued Twitter over the last year should be corrected by now. Yet, contrary to popular belief, Dorsey's role as the permanent CEO did not begin until October of last year. Thus, he did not even have one full quarter as the permanent CEO to create change at the company.
After all, Dorsey did not make any major changes while serving as the interim CEO in the three months prior to the announcement of his permanent position. Prior to October, Twitter was actively seeking a "full-time" CEO. With Dorsey also the CEO of Square, and not believed to be the permanent option for Twitter, he was likely told to keep the ship from sinking, rather than to rebuild it from the inside out.
Since then, Dorsey has made some big changes, those where the effect can not yet be measured; a fact that analysts don't seem to realize.
In response to Twitter's fourth quarter earnings, Oppenheimer analysts said that it has limited confidence in Twitter's ability to re-accelerate MAU growth. Pac Crest and Topeka shared similar concerns, with the former calling Twitter's fourth quarter an "end of the hope trade."
What Oppenheimer, Pac Crest, and Topeka are referring to is the fact that Twitter's MAUs are stuck at 320 million. This lack of MAU growth is perhaps the biggest knock against Twitter, with investors concerned that TWTR will be unable to demand higher ad prices without user growth. Yet, Twitter's ad revenue rose 48% in the quarter, which was driven by a 153% increase in ad engagements.
That said, Twitter's lack of MAU growth is a big reason that shares fell 4.4% in response to earnings, and why TWTR stock is down 70% the last year. What investors are forgetting to consider is that Twitter is now showing ads to the 500 million users who are logged off. This news was announced in December, therefore it had no impact on fourth quarter earnings. It is also one of Dorsey's biggest moves as CEO.
According to Twitter, there are 500 million people who consume Twitter that don't actively use Twitter, or have accounts. These people see tweets on websites, mobile apps, in articles, or in Google search among other places. After much debate, and criticism about how Twitter can convert those users to the platform, Dorsey made the decision to begin showing promoted tweets to its logged out userbase of 500 million, rather than wasting money trying to convert those consumers to users.
Hence, growing the user base no longer matters, because Twitter will monetize a far larger user base regardless if they are MAUs or not. And according to the company, logged out users can be monetized at about half the rate of logged in users. This creates the opportunity for significant long-term revenue growth.
Given that this move came in December, just two months after Dorsey's tenure began, it seems somewhat premature to be calling Q4 Twitter's "end of hope trade" or to be noting a lack of accelerated MAU growth as a reason to sell TWTR stock. The logic does not make sense.
In addition, there are other major moves that Dorsey has made in the last month(s) that were not noticed in Q4 but will be long-term.
This includes Dorsey's decision to lay off 8% of Twitter's workforce to streamline its operations. Dorsey did this immediately after taking over in October. However, this move did not have an effect on Twitter's bottom line in the fourth quarter, but it will in future quarters.
The point is that Twitter's fourth quarter was not a proper reflection of Dorsey's vision or the effect that his bold moves will have on the company. While Twitter will never be Facebook (NASDAQ:FB), and is in fact a niche service, it is also very cheap at just 3x this year's expected sales, and the stock is completely discounting the effects that many of Dorsey's moves should have on Twitter's business.
With the stock beaten down so badly, I am betting on the boldness of these moves, and believe that many of the positives from Twitter's fourth quarter like ARPU growth, video, and active advertiser count will only improve as Twitter goes from monetizing 320 million users to 800 million. This huge increase in total users, and the reduced costs from job cuts is a big enough reason to give Dorsey and TWTR stock a chance.
Disclosure: I am/we are long TWTR.
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.