- Some outcomes of Twitter's Q3 were truly commendable.
- Yet, there's more than meets the eye, especially on downside.
- Should you buy TWTR stock now? We'll review the facts and let you decide.
San-Francisco, California-based Twitter Inc (NYSE:TWTR) reported its Q3 earnings on 27 October, beating analyst estimates of revenue and Earnings Per Share (EPS). Investors were visibly thrilled, driving Twitter shares ~5% higher at the peak of the excitement. But the stock cooled off towards the end of the day, conceding the early gains, to close just 0.64% higher. Undoubtedly, Twitter's third quarter did deliver some commendable outcomes. But should you buy TWTR stock now? We'll lay out the facts and let you decide.
First, The Good Part
Twitter's Q3 results beat expectations, delivering 13 cents in non-GAAP earnings per share, and $616 million in revenue. Twitter's revenue grew by 8% YoY (Year-on-Year), while EPS improved by 30% over the year ago. Twitter added 4 million Monthly Active Users (MAUs), to take its tally to 317 million, up sequentially from 313 million. The micro-blogging site also cut its workforce by ~9%, and conveyed its intent to reign in stock-based compensation expenses. Twitter CEO Jack Dorsey also highlighted the company's desire to register GAAP-profits in 2017, and that comes as a huge relief, given that it registered losses worth ~103 million in Q3 alone. What's more, Twitter recorded its fourth straight quarter of positive free cash flows, which will allow the company to bid more aggressively for content licenses, and expand live streaming.
Twitter also said it would shut its struggling short video platform Vine, which it acquired for $30 million, four years ago. Twitter also saw its ad-rates (cost per engagement or CPE) fall at a slower pace. CPE fell 44% YoY, compared to the 64% fall in Q2. Further, ad-engagement on the platform nearly doubled, growing by 91%. Twitter's management also claimed to be seeing "accelerating rates of growth on a year-over-year basis for daily active usage, Tweet impressions and time spent on Twitter", with Daily Active Users (DAUs) growing by 7% YoY, up from 5% in Q2, and 3% in Q1 this year. Sounds great?
Now Here's The Problem
In one sentence, "better than expected" is not exactly a proxy for good. Beating analyst estimates is not the be all and end all of corporate endeavors. Analyst estimates for the quarter actually stood at $678 million before Twitter issued a significantly lower Q3 guidance at the end of Q2. Lowering the bar by as much, and then beating expectations earns you no glory. It's also worth noting that Twitter's ad-revenue in the US (where all the live streaming action is centered) actually fell YoY, albeit by a marginal 2%. It's the international ad-revenues and the data licensing business that lent support to the top line.
That said, a turnaround in sales growth will take time. Twitter will have to continually show improvements in engagement levels and possibly even user growth, to win back ad-Dollars. And that's why, we're not going to cry ourselves hoarse about the company's decision not to provide Q4 guidance. What Twitter needs to demonstrate now is the ability to draw and engage users, and that's precisely where the bigger problem is.
Have User Growth & Engagement Improved?
For the quarter, Twitter recorded 317 million MAUs. Adding 4 million MAUs doesn't qualify as great if you "consider that each day there are millions of people that come to Twitter to sign up for a new account or reactivate an existing account that has not been active in the last 30 days." as per management commentary in the letter to shareholders. What's more, YoY DAU growth tells us nothing, in the context of a turnaround in Q3.
The numbers stated by the management are YoY growth numbers. As an investor, would you be enthused by a YoY growth in monthly active users without seeing sequential growth? The same goes for daily active users, tweet impressions and time spent on Twitter, which might have grown over the year ago; but that doesn't tell us if they've improved over Q2 or Q1. On the conference call with analysts, Twitter's management did not disclose the absolute number of DAUs on being asked by Anthony DiClemente of Nomura Securities. While that's understandable, investors would do well not to be appeased by just one side of the story.
The Impact Of Job Cuts
Cutting jobs will cut costs, because Twitter spends much more on Sales And Marketing, than it does on R&D. But, it's not that simple. The last time Twitter announced job cuts, it reportedly juiced up compensation packages with restricted stock and cash bonuses to boost employee morale. A closer look at Twitter's Q3 numbers shows that Sales And Marketing accounts for just ~26% of stock-based compensation (SBC) expenses. Bulk of this expense is related to the R&D line item, which won't be impacted by the layoffs. So, the potential risk arises from the possibility that Twitter could take that route again.
Further, while the management has said that it intends to curb these expenses, it's Q4 SBC projection of $150-160 million suggests that it might not happen in a hurry. To put things in perspective, Twitter has spent over $2.3 billion on stock based compensation since it went public. Given Twitter's cumulative losses of $1.9 billion since then, this one line item has been the difference between GAAP profits and losses. At least till we see a material reduction in these expenses, the risk of dilution persists.
Live Streaming And Ad-Dollars
Twitter has registered some wins in live streaming, beating youtube in terms of live viewership of the US presidential debates, for instance. Understandably, the platform is now looking to win some share of ad-budgets too, and the commentary below sounds encouraging at face value:
"this OLV marketplace is about a $9 billion or $10 billion ad market with most of the money coming from video-centric services like YouTube and the like"
The narrative is encouraging for Twitter, but let's not jump the gun here. In the context of ad-spends related to the upcoming elections, a Reuters post brings to light noteworthy points, which suggest that Facebook is way ahead in this race, and bringing ad-Dollars back isn't going to be easy. The report suggests that Facebook may be receiving a much bigger allocation of election related ad-budgets, because a significantly bigger chunk of voters spend time on that social network, rather than Twitter.
Summing It Up
The were some very commendable outcomes from Twitter's Q3, but as it appears, there probably isn't enough reason to be terribly excited, yet. As Jim Cramer aptly put it, "it was not the disaster that some people expected". But that doesn't mean it was great either. Going by the management's commentary, there seems to be an improvement in engagement levels. However, we might need to look at more metrics which are currently not made available, to be sure. Last but not the least, Twitter does look in better shape than it was earlier this year, but do you value a company that's growing at 8% YoY, at ~5X sales? Probably not. There's some froth there leftover from the buyout rumors, and investors would do well to avoid the stock for now.
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