Tough Talk for Twitter Investors

 | Apr 29, 2014 | 12:00 PM EDT  | Comments
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At their peak in late December, Twitter (TWTR) shares reached $73 apiece -- not bad when you consider that the stock entered the month around $41, the level it's trading at now.

But its first earnings call as a public company worried Twitter investors. It started with this question to CEO Dick Costolo from Goldman Sachs' Heath Terry: "Dick, you've touched on the fact that there were some factors that negatively impacted what would have been normal timeline growth due to the product enhancements. Was there anything like that that would have impacted user growth in the quarter or made the growth rate in Q4 less comparable to the number that you guys printed for Q3?"

Costolo gave a long and rambling answer that I won't repeat entirely, but this is the key passage: "Going back to that statement I made about Twitter being the only platform that is simultaneously public, real-time, conversational and widely distributed, we believe those four pillars are the right four pillars to help us reach every connected person on the planet. In other words, we don't think we need to change anything about the characteristics of our platform, we simply need to make Twitter a better Twitter."

He didn't really answer Terry's question about why the user growth would have slowed in the fourth quarter relative to the third quarter. He basically was saying that Twitter just needs to keep making the product more usable and easier for folks to get "onboarded" with Twitter.

That's worrisome to Wall Street investors. The long answer suggests that Costolo is defensive on the issue and doesn't really have a coherent response to the question.

If you have to work hard to attract users to your service, it sounds like a death knell to investors. Of course, monetizing the users base will happen, but investors won't be so generous with the price-to-sales multiple. Currently, even selling for half of what it sold for in December, it's still got a 35x price-to-sales multiple. It's too high, especially in this environment.

The second question on the earnings call came from Ross Sandler of Deutsche Bank. "I hate to kind of beat the dead horse, but, Dick, you guys have said that the No. 1 priority is driving [monthly average user] acceleration. And, I guess, given the amount of attention that Twitter got in the fourth quarter around the IPO and just in general, and the fact that you guys have been testing a lot of these new features, did any of these new rollouts create MAU churn, or were you disappointed by the level of MAU growth that you saw in the quarter?"

Costolo's answer, in part, was this: "We know from our user research the kinds of things that cause users to become more engaged and stick with the product and core and make it indispensable to them. So it's those things that we're looking to drive into the product. We're seeing the early results of those things like the things we launched in Q4, having the kinds of results we'd hope they have. So it's my hope and our belief and why we are confident in our hypotheses that those will continue to deliver the kind of results we expect, all in service to the user growth we all hope to see."

Translation: We got this; we know how to fix this problem and we're fixing it.

But Twitter hasn't been fixing it for a while, and adding a few blue lines or stars in the timeline that make you accidentally favorite more tweets in your timeline isn't a user-growth answer. We will see how many tweaks Twitter can point to later today in its next earnings report.

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