Twitter’s share price dropped more than 20% Thursday morning as investors reacted to news of slowing growth.
On Wednesday, after the stock markets closed, Twitter published its first quarterly earnings report since going public. The company made more money in the last three months of 2013 than analysts expected. However, the social network also announced it had 241m users at the end of 2013, just 9m higher than the previous quarter.
Chief executive Dick Costolo also disclosed that, in the last quarter of 2013, the number of “timeline views” – Twitter’s equivalent of page views, and a key measure for advertisers – dropped for the first time in the company’s history.
The shares crashed during after-hours trading and continued to fall as the stock markets opened Thursday.
Sam Hamadeh, founder of financial analyst PrivCo, said it was clear the healthy increase in Twitter’s share price, which the company has enjoyed since its initial public offering last November, had outstripped its actual performance.
“At this stage in its growth, Facebook was growing users at nearly triple the rate Twitter just reported growing them,” he said. “Twitter added just 9 million users, or less than 4% sequential growth. This company is being valued at sixty times its revenues – a nosebleed valuation – on the expectation it will grow revenue 100% annually for the next 5 years or more,” he said.
Hamadeh said Twitter could not possibly grow its ad revenue by 100% if its audience is growing at this rate. “It would be like expecting American Idol to double revenue next year when its ratings show its audience grew just 15%. It’s not happening,” he said.
The slowing user growth and fall in timeline views came as Twitter made a number or major changes, redesigning its mobile apps and websites and adding image and video previews to Tweets. The moves were designed to improve “engagement” – a key measure for advertisers who want to see their content favourited, retweeted and commented upon.
According to the earnings report issued on Wednesday, in the three months ending 31 December, the company had revenues of $242.7m, an increase of 116% compared to $112m in the same period last year. It made a net loss of $511m for the fourth quarter of 2013, compared to a net loss of $9m in the same period last year.
Twitter said it expected first-quarter revenue to be in the range of $230m to $240m, with revenue for the year of between $1.15bn and $1.2bn, nearly double the $665m it posted in 2013.
“Twitter finished a great year with our strongest financial quarter to date,“ said Costolo. “We are the only platform that is public, real-time, conversational and widely distributed, and I’m excited by the number of initiatives we have under way to further build upon the Twitter experience.“
In a conference call with analysts, Costolo was quizzed about his company’s slowing user growth numbers. He said the company was “doubling down on accelerating growth in our core user base” in 2014. Twitter has “massive global awareness”, he said, but needs to make it easier for new people to “get it”.
Costolo said changes to Twitter’s products had already made significant differences, increasing the numbers of retweets and favourites. “We believe combined changes over the course of the year will start to change the slope of the user growth curve,” he said, and asserted that the company had a clear “roadmap” for growing user numbers. “I’m delighted with the early results,” he said.
Twitter has attracted some unusually negative coverage from analysts since it went public last year. Shares sold at $26 a share during the initial public offering and have traded as high as $74.73.
Before the results were issued, 30% of the analysts following Twitter had posted sell ratings on the company’s stock, while 27% listed it as buys and 43% were neutral, according to analyst FactSet. By comparison, 89% of analysts following Facebook are recommending a buy and none are posting sell ratings. Sell notes account for just 6% of all the analyst recommendations covering the S&P 500 list of the top US companies.
Analysts are not only concerned with Twitter’s growth, but also with the fact that while Twitter’s revenue is more than doubling each quarter, it has yet to make a profit. Shyam Patil, analyst at Wedbush Securities, said for many analysts, the company’s share price had risen “too far too fast”.
Patil, who has a neutral rating on the company, said no new information had come out on the company before the quarterly results, and the share price had been driven up by expectations rather than facts. “I think it’s a good business. It is clearly differentiated from the competition,” he said. He noted that Twitter had yet to figure out how it was going to make money, and that at the moment the sky-high valuation was based on bets that it would hit on a lucrative plan.
“You could see an incredible house and think it’s worth half a million only to find out it’s being sold for $2m. It’s still a great house,” he said.
Twitter is still expanding quickly – the disappointing quarterly user growth figures still represent a 30% rise year-on-year. But it has captured a very small portion of the overall digital ad market. Twitter accounted for 0.5% of global digital ad revenues in 2013, according to eMarketer, up compared to 0.3% in 2012. Facebook, by comparison, accounts for 5.7% of global digital ad spending, and Google for 32.4%.
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