The following commentary was originally sent to Action Alerts PLUS subscribers on Oct. 27, 2015, at 4:59 p.m. ET.
Twitter (TWTR) reported solid third-quarter results yet issued severely disappointing guidance after the close Tuesday.
For the quarter, the company posted EPS of 10 cents -- twice that of consensus -- and revenue of $569 million, slightly above the Street at $559 million. The critical metric -- total average monthly active users (MAUs) -- were 320 million for the quarter, up 11% year over year and slightly up sequentially.
Twitter's solid third-quarter results were washed out by management's disappointing guidance. The company sees fourth-quarter revenue between $695 million and $710 million, well short of consensus at $740 million. Fourth-quarter adjusted EBITDA is projected to be in the range of $155 million to $175 million vs. nearly $200 million consensus. Management noted that expenses are projected to rise as a result of the company's corporate restructuring activities.
While the results are a letdown, we are not necessarily surprised. Twitter has been a Three-rated name in our portfolio for over six months, given our skepticism around management's ability to drive real and meaningful change. The intraquarter results are far less important than the outlook; in order for investors to have conviction, the company must demonstrate a path toward growth, user engagement and concrete improvements within the core model. At this point, Twitter's oft-cited "potential," "opportunity" and "differentiation" feel more like a pipe dream than anything else.
While the potential still exists, the urgency of the situation has escalated. We will continue to stay on the sidelines for the time being.