Twitter Inc. (NYSE/TWTR): Here’s Why This Stock is Down 9.7%

Twitter stock down by 9.7%Slow user growth and soaring expenses continue to plague Twitter Inc. (NYSE/TWTR), signaling the social media company may not have the expansion potential investors originally anticipated.

At first glance, Twitter’s second-quarter earnings report looked good. Revenue increased 61% year-over-year to $502 million, beating analyst expectations of $481 million. Excluding exchange rate impacts, the increase in revenue would be 68%. (Source: Twitter Inc., July 28, 2015.)

Adjusted net income was $49.0 million for the quarter, translating into adjusted earnings per share (EPS) of seven cents. Once again, that number handily beat analysts’ expectations of four cents per share.

“Our Q2 results show good progress in monetization, but we are not satisfied with our growth in audience,” said Twitter’s interim CEO Jack Dorsey. “In order to realize Twitter’s full potential, we must improve in three key areas: ensure more disciplined execution, simplify our service to deliver Twitter’s value faster, and better communicate that value.”

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Yet the good news was not enough to satisfy investors. Following the announcement on Tuesday, Twitter shares plunged as much as 9.4% in after-hours trading.

What went wrong? User growth remains meager at best. According to the earnings report, average monthly active users (MAUs) were 316 million in the second quarter, up only 4.6% from the previous quarter.

Investors have been concerned about dropping user growth numbers for quite a while. This report shows those problems aren’t going to end any time soon. During the conference call, Chief Financial Officer Anthony Noto admitted Twitter would not see “sustained, meaningful” user growth for a “considerable period of time.”

Worse still, the company is struggling to control cost. Twitter reported a net loss of $137 million. This was mainly due to the company’s $175 million stock-based compensation expense incurred in the quarter.

Looking forward, management only expects revenue to grow in the high-single digits during the third quarter of 2015, in between $545 million and $560 million. While most companies would love to see that kind of growth, those numbers aren’t impressive for a technology stock with a $22.0 billion market capitalization.