Twitter stock (NASDAQ:TWTR) closed last week on an up note, surging 16 percent to close at $48 a share the day after reporting fourth-quarter earnings. The rally came as a rebound after investors initially sold off the shares after learning that Twitter grew its user base by only 1.4 percent from the prior quarter. That was 4 million accounts — far below analysts’ estimates and the prior three quarters’ growth levels.
Fortunes quickly changed when Twitter executives got on a conference call with investors and explained that the slow growth was due to a bug tied to Apple’s latest operating system and routine seasonal slowness. They said January was going great guns and it looks like user growth for the current quarter would be back to prior levels — more like 14 million.
Twitter’s fickle friends on Wall Street rushed to buy. But even if investors are temporarily satisfied, there are still reasons for concern about the company’s ability to hold onto its status as one of the Web’s titans. Here are five lingering questions about Twitter’s future:
Is Twitter attracting enough new users? And young ones?
Twitter’s Q4 user growth was the lowest on record. It won’t be clear until the next quarter if that was really due to temporary hiccups or a shift in Internet appetites. CEO Dick Costolo himself admitted in an internal memo leaked to the press just the day before the company posted earnings that abusive “trolls” on its service were scaring off new users.
Twitter is actually quite a bit smaller than its big-time rivals. It now has 288 million active monthly users compared to Facebook’s 1.3 billion. Perhaps more concerning, Instagram, a comparative newbie owned by Facebook, now boasts 300 million active monthly users.
Concerns have long existed that Twitter isn’t popular with young people. In a viral blog post explaining how teenagers use social media, a 19-year-old student at the University of Texas at Austin wrote, “To be honest, a lot of us simply do not understand the point of Twitter.” Instagram and Snapchat are teens’ social networks of choice.
Morningstar technology strategist Rick Summer questions whether Twitter can ever reach the size of giants like Google and Facebook. Without that kind of massive scale, he doesn’t think it can compete to win the advertising business it needs for revenue growth. Other analysts, such as Pivotal Research Group’s Brian Wieser, say Twitter doesn’t need more user growth to build a large, successful business.
Where are the profits?
Twitter is still posting a large, but shrinking, net loss each quarter — $125 million for the last three months of 2014. But looking at a cash flow figure called EBITDA (earnings before interest, taxes, depreciation and amortization), Twitter is starting to make money. It earned $141 million in the last quarter, or 12 cents per diluted share, when analysts were expecting six cents.
Sales in Q4 were $479 million, also better than analyst expectations for $453 million. Wieser sums it up as “a very positive business story.”
Until Twitter’s traditional GAAP (generally accepted accounting principles) results get in the black, questions about profitability will linger, though. Twitter’s stock fell 40 percent in 2014, when its annual operating loss was $577 million.
Will changes the company is making work?
Twitter has been criticized in recent years for a failure to innovate. It’s responding now by unveiling a host of new features.
It has rolled out a new “while you were away” section to its scroll to highlight missed posts, group direct messaging and new video functionality, all of which should appeal to users. Just this month, the company renewed a deal with Google and arranged that real-time tweets will show up in search engine results. That won’t roll out for a couple of months, but it should help bring new users to the service. Twitter is also experimenting with new ways to make its homepage more interesting to visitors who haven’t logged in or created an account yet. Finally, it is building a new revenue stream by syndicating sponsored tweets to third-party sites like Flipboard and Yahoo Japan.
It’s a lot all at once. But if some of those changes stick, concerns about the company failing to innovate should be appeased.
Is Costolo the right CEO?
Costolo, who became CEO in 2010, started off the year as the quintessential embattled CEO. Everyone from CNBC’s Jim Cramer to stock analysts to a prominent Harvard Business School professor was calling publicly for his ouster.
The improved business metrics plus the new launches in January have eased some of the pressure, at least for now. “A number of encouraging factors pointing to reacceleration,” Nomura analyst Anthony DiClemente wrote in a research note Thursday.
Most of Costolo’s detractors will vanish with the improved stock price. But expect to hear more concerns about his leadership if user growth remains slow and the stock price slumps again.
Is the stock too expensive?
The simple answer is yes. Twitter’s forward price-earnings multiple is 64, based on non-GAAP earnings estimates. Nomura raised its price target after the latest earnings report to $48 a share from $45. Morningstar puts the fair value of Twitter shares at $40. The stock closed Friday at $48.
Friday’s run-up shows that many investors’ concerns about growth, management and innovation were appeased with the latest results and management commentary. But, as was evident in Thursday night’s flip-flop, Twitter investors can be quick to change their minds. Costolo and his team still have plenty of work to do.
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