I've waited a few days to take my stance on Twitter (TWTR) after its third quarter. For one, I wanted to see what the stock would do. Second, I wanted to let the barrage of commentary pass.
I am notoriously critical of tech stocks. The last time I touched on Twitter I predicted we'd see shares fall into the $20's. Not to gloat, but it happened. Then we saw an almost immediate 15% bump from those lows after Twitter reported its third quarter results. If you missed grabbing shares before that jump, I think the opportunity has been missed here. I am pleased with the progress the company has made to improve its income. Furthermore, advertising revenues were surprisingly strong despite a user decline. It might be difficult for them to produce big user growth while they purge "unkind" accounts, but it casts a cloud over how this will all pan out. We don't have a clear picture of Twitter's ability to grow users. That will limit future potential regardless of how you slice it.
Credit where credit is due
Unlike Snap (SNAP) , Twitter has created a financially viable business. Revenue increased 29% year over year to $758 million in the quarter. Ironically, advertising revenue increased a comparable 29% to $650 million. I'm particularly pleased at how they're successfully driving advertising revenues, despite lackluster user growth. It demonstrates that all Twitter accounts do not hold the same financial utility for the company. Twitter is definitely learning to make more from the "intrinsic" users. Improvements in operating income and subsequent earnings are exactly what were needed to offset the stock's decline. 2018 is finally showing us better management of the company's expenses relative to its revenue growth. Because of that, Twitter is making a more compelling case for itself.
One should note that the $789 million in net income is a bit misleading. The company had a deferred tax asset valuation of $683 million. Without that, the company made $106 million. That profitability is in stark contrast to last year's loss of $21 million. With diluted earnings of $0.14 vs. ($0.03) in 2017, Twitter is certainly moving in the right direction; and with over $1.9 billion in cash/equivalents, Twitter is well capitalized. There are no concerns from that end of things.
The lack of an expanding audience
A problem bolstered by attempts to remove "undesirable" accounts, Twitter's monthly active user growth is not what the doctor ordered. Total monthly users declined by 9 million as the company works to clean up its account base. I've always felt that the platform lacked the broadness required to gain a huge following. This isn't like a Facebook (FB) , or a Netflix (NFLX) . It certainly does appeal to those looking for news, and access to celebrity quotes, etc. But the simplicity of its design doesn't allow for widespread demand. I predict that monthly user growth will always be slow. Because of this, Twitter has to succeed through efficient monetization of its more limited user base, keeping them ever more engaged in order to derive more advertising revenues. Thus far in 2018 the company seems to be succeeding. The revenue growth and subsequent earnings speak for themselves. The question is: how many more quarters the company can derive revenue growth without more robust user growth? Does the revenue and earnings growth positively relate to what the stock is actually doing?
Daily active users (an appealing metric for advertisers) increased 9% in the third quarter. That's 2% slower than in Q2. Obviously it probably related somewhat to the removal of spammers, and users with "ill intent", for lack of a better phrase. Still, this is something to watch. What we're seeing right now is a better monetization of the company's good customer base. Word from Jack Dorsey, as well as the CFO, seems to imply that this trend will continue for awhile. That's certainly great news. I'm glad to see Twitter finally making better use of its revenue.
Over a long term basis, I still find myself questioning the legitimacy of Twitter's stock. They can only derive so much revenue growth from a stagnant consumer base. Unless they can manage to truly drive up users, this will all be a one act rally. The earnings will run as far as they can, but it will all be limited. Therefore, I don't trust the story yet. I think it wiser to wait until much of the "user purge" excuse has passed, and we can truly see what is happening with Twitter's user base.