A Worrisome Quarter From Twitter

 | Feb 06, 2014 | 7:24 AM EST
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On the one hand there's a company that delivers accelerated revenue growth, with expenses going down as a percentage of revenue and revenue that's flying through the roof.

On the other hand there's a company that measures itself by one chief metric, monthly average users, and engagement is now cooling.

That's why Yelp (YELP) will soar today and Twitter (TWTR) will fall flat.

Both companies totally controlled the thought patterns among the analysts here. Twitter gave you the impression that there was accelerating usage, that more and more people were coming to Twitter and that, therefore, the advertisers are growing happier and happier.

Instead, for whatever reason -- and, believe me, there was no clear one on the call -- there either seem to be a more finite number of users than what we had thought, or the big Twitter craze has peaked and peaked hard. Frankly, we just don't know which it is, but the company quickly switched the discussion on the call to how advertisers like Twitter. That's great, but we all know that advertisers like television, too. Without growth nobody really cares, and you end up with what amounts to a premium earnings multiple vs. that of the S&P 500.

Good luck looking for that with Twitter. You are talking about a $20 stock if that's the case -- yep, a 50x multiple on 2016 earnings, about the highest multiple I can find for companies that could double earnings over the next two years. Don't laugh -- using that same multiple, I can get to $100 on Facebook (FB), so it isn't such a bad shorthand.

On the other hand there's Yelp. Here's a company that told us to measure it by revenue growth and repeat-advertising and leverage, meaning are the company is getting more ads from more users and seeing the cost of selling those ads go down. The answer, unequivocally, is, "Yes, that's precisely what's happening," and it is a thing of beauty. Revenue grew at 72% year over year for the quarter, when it had previously been growing at 65%. Local-ad revenue grew 71%. Gross margins are sensational, because it is all user-generated content anyway.

Yelp is the local version of Google (GOOG), and it is paying off huge. Yelp may literally have too much business to handle.

Twitter has market capitalization of $37 billion market with advertising that is still advancing, but rates will peak if users peak.

Yelp has a $5.2 billion market cap with no fence for revenue in sight.

Something's very wrong with this picture.

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