Since Twitter Inc. (NYSE:TWTR) released its earnings after the closing bell on July 28th, its stock price plunged. In a little over one week, Twitter’s shares lost more than 22%.
Mind you, Twitter has some big-name followers. In his hedge fund’s latest filing to the SEC, billionaire investor D.E. Shaw reported that he had increased his position in Twitter by more than 200% to 2.57 million shares, worth approximately $128.9 million.
Another billionaire investor, Jim Simons, also has a significant position in Twitter. According to his hedge fund’s filing to the SEC, Jim Simons’s Renaissance Technologies had 2.62 million shares of Twitter, worth around $131.4 million.
The question is, should investors warm up to Twitter, especially since it looks down and out right now?
(Chart Courtesy of Stockcharts.com)
If you just look at Twitter’s earnings report, the numbers are not that disappointing. In the second quarter of 2015, Twitter generated $502 million in revenue, a 61% increase year-over-year, and also beat the forecasted range of $470-$485 million. Excluding exchange rate fluctuations, the increase in revenue would be 68%.
Twitter’s net loss narrowed down as well. In the second quarter, the company had a net loss of $136.7 million, a smaller number compared to the previous year’s quarter loss of $144.6 million. This translated to improved loss per share from $0.24 to $0.21.
The company enjoyed strong growth in its advertising business. In the second quarter, advertising revenue increased 63% year-over-year. Moreover, the company managed to monetize on the growing usage of mobile internet: mobile advertising accounted for 88% of Twitter’s total advertising revenue.
Twitter’s stock price initially surged after the earnings release, but things went sour very quickly as the conference call started. (Source: Seeking Alpha, last accessed August 6, 2015.)
After acknowledging the company’s revenue growth, co-founder and interim CEO Jack Dorsey said that “product initiatives we’ve mentioned in previous earnings calls like instant timelines and logged out experiences have not yet had meaningful impact on growing our audience or participation.”
“This is unacceptable,” he continued. “We’re not happy about it.”
Monthly active users (MAUs) also turned out to be troubling. Again the numbers looked good from the surface. MAUs were 315 million for the quarter, 15% higher year-over-year. However, according to Twitter’s CFO Anthony Noto, “MAUs in Q2 did not benefit from the same factors that benefited Q1. Specifically, we did not see organic growth, positive seasonality, or growth initiatives seen in Q1.”
The biggest disappointment was that the company had trouble explaining the value of its service to users.
You see, for consumers to use a product or service, it has to serve a purpose. However, as Anthony Noto mentioned in the earnings call, Twitter had only reached early adopters and technology enthusiasts. For others, Twitter is yet to convince them of its value.
Here’s a fact: Twitter has over 95% brand awareness of its most important global markets. However, Twitter only managed to achieve less than 30% penetration of users in those markets.
The reason behind Twitter’s low level of penetration is twofold, according to the company’s CFO, “we have not communicated why people should use Twitter, nor made it easy for them to understand how to use Twitter. This is both a product issue and a marketing issue.”
What it Means for Investors
Despite having reasonable growth year-over-year, Twitter has yet to turn profitable. As for investors, if a company is not making money, it better have solid growth and potential to make money in the future.
Twitter has done a decent job monetizing on its somewhat good user growth, as reflected in its growing revenue. The problem with Twitter is that the user growth so far is very likely within early adopters and technology enthusiasts. That is, Twitter is yet to reach the mass market.
If the company manages to reach the mass market, then it could compete in the same league as Facebook Inc. (NASDAQ:FB), who currently has MAUs of 1.49 billion, nearly five times of Twitter’s. However, Twitter’s product is a very different one compared to Facebook’s, and the company is yet to show signs that it can convince the mass market to use its product. Until then, Twitter’s stock price would continue to reflect investors’ concerns about the company.