Why Twitter Stock May Continue To Languish Post Q4 Earnings

  • Twitter reported healthy Q4 2015 earnings that topped expectations.
  • Twitter's ongoing user growth problem, however, continues to persist.
  • Twitter has been making good progress with video streaming with video views rising sharply.
  • Is Twitter stock a worthwhile investment at this point?

Twitter Earnings Beat Estimates

Leading microblogging site Twitter (NYSE:TWTR) has reported Q4 2015 earnings that beat top and bottom line estimates by analysts but failed to meet user growth projections. Twitter reported Q4 2015 revenue of $710M, good for 48.2% Y/Y growth and in-line with the consensus on Wall Street. Twitter's non-GAAP EPS of $0.16 was a 33.3% Y/Y improvement and $0.04 higher than analyst estimates. On a GAAP basis, Twitter reported EPS of -$0.13 compared to -$0.20 which the company reported during the previous year’s comparable quarter. Mobile ad revenue accounted for 86% of total revenue.

As usual, all eyes were on one metric that has come under a lot of pressure lately: Twitter’s user growth. Q4 monthly active users, or MAUs, totaled 320M, flat Q/Q and up a mere 9% Y/Y, below Wall Street expectations. Excluding SMS Fast Follower users, Twitter’s MAUs actually declined by 2M Q/Q from 307M in Q3 to 305M in Q4, and increased only 6% Y/Y. Twitter announced that it plans to stop using SMS Fast Follower users in its MAU count starting Q1 2016. Mobile MAUs accounted for the lion’s share of Twitter users, at 80% during the quarter and unchanged from Q3.

Twitter said that its advertiser base had grown a healthy 90% Y/Y to reach 130,000 advertisers by the end of the quarter. Twitter, however, still has a long way to go before it can even begin to approach Facebook’s 2M+ advertisers. Meanwhile, the company made strong progress with its ongoing native autoplay video ingtergration program, with video views rising 220x Y/Y.

Twitter Provides Soft Guidance

Twitter issued rather soft guidance for Q1 2016 and also failed to give any revenue guidance for the full year. The company said that it expects Q1 revenue in the range of $595M-$610M, good for 38% Y/Y growth at the mid-point. Meanwhile, the company said that it expects its EBITDA margin for the full year to be in the 25%-27% range compared to 27% recorded in 2015.

User Growth Concerns

Although Twitter’s user growth has been slowing down for some time now, the investing world did not consider that to be a big problem until quite recently when it appeared to be close to hitting a plateau. The last quarter marked the first quarter when Twitter’s user growth actually entered negative territory when viewed on a Q/Q basis.

TWTR-1

Source: The Verge

Worries about slowing user growth have badly depressed Twitter stock, which is down 35.3% YTD and 67.6% over the past 12 months, despite the fact that Twitter’s top line has continued expanding at a healthy clip.

TWTR stock chart

Twitter stock price chart by amigobulls.com

The problem appears to be particularly bad in Twitter’s U.S. market where signs of stagnation started showing a couple of quarters ago. Although revenue from the U.S. market is still growing at a healthy clip, up 48% during Q4 compared to 51% growth for international markets, investors still worry that Twitter cannot continue juicing more and more dollars from a stagnant or even shrinking userbase. The U.S. market contributed $463M to Twitter’s top line, or 65.2% of the company’s total, underlining how important this demographic is to the company.

Twitter said that it was lining up some measures to fix the user growth problem:

"We are going to fix the broken windows and confusing parts, like the .@name syntax and @reply rules, that we know inhibit usage and drive people away."

The company said that it expects to continue developing its video streaming capabilities in 2016:

"We have five priorities in 2016 to serve this focus: refinement of our core service; live streaming video; our creators and influencers; safety; and developers. Each is critical to us strengthening our platform and audience around live.

With video views up sharply during the quarter, Twitter might be able to attract more marketers to its platform. The company said that its total number of users including logged out users were above 800M during the quarter. The company reported that it had managed to grow direct messages by 61% Y/Y during the quarter, which is a sign of growing user engagement. Twitter started displaying ads to logged-out users in certain markets towards the end of 2015. Although the company did not go into the details of how the experiment is going, investors will no doubt be eager to check and see how this will impact on Twitter’s growth in the coming quarters especially since the company has many more logged-out users than active ones.

Twitter Earnings Investor Takeaway

Twitter’s user growth problem is nothing new, and Twitter's stock fell just 3% in aftermarket trading after the Q4 report. Although it’s not likely that investors will stop talking about the company’s non-growing userbase, it’s also quite likely that investors will start paying more attention to Twitter’s new growth initiatives including video streaming and the attempts at displaying ads to logged-out users. It appears as if a lot of pessimism has already been baked into Twitter shares at this point which might limit their downside. If Twitter’s new growth engines gain good traction in the coming quarters, Twitter shares might be able to stage a comeback.

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