No matter how the detractors and naysayer tried to spin it, they just couldn’t convince the majority of investors that Twitter Inc (NYSE:TWTR) posted disappointing numbers for the fourth quarter.
The fact that TWTR stock rallied more than 7% in after-hours trading following the Twitter earnings news posted Thursday afternoon confirms the market is seeing the glass as half full rather than half empty.
TWTR Stock Earnings
Last quarter, Twitter turned an operating profit of 12 cents per share of TWTR stock on $479.1 million, versus a year-ago loss of $1.41 per share on $242.7 million in sales. Analysts were only expecting to see an operating profit of 6 cents per share of TWTR stock on $453.8 million in revenue.
Almost needless to say, the results leave little for anyone to complain about. Yet, some observers did manage to drudge up some worries regarding the Twitter earnings announcement.
The core of the concern was the pace of user growth in the fourth quarter. Twitter averaged 288 million users that logged on and looked around at least once per month, only a slight increase from 284 million in the previous quarter and far below the 295 million that analysts had expected.
The fourth quarter figure was 20% larger than the average monthly user number from the fourth quarter of 2013, but compared to last year’s 23% year-over-year growth rate, the numbers were a letdown.
Even so, the company told current and would-be owners of TWTR stock to ratchet up their expectations for the current year. The company believes it will drive revenue of somewhere between $2.3 billion and $2.35 billion in 2015, versus estimates of $2.3 billion. Twitter didn’t offer any sort of earnings projection for the current year, but as of the latest look, analysts expect a profit of 34 cents per share of TWTR stock in 2015.
The company also expects to add between 13 million and 16 million users in the current quarter, which would be at a faster pace than the sequential user growth of 1.4% clocked in the fourth quarter of 2014.
More Initiatives to Drive Growth
While the Twitter earnings call served up some color on the trailing numbers, it also gave the company’s management team an opportunity to detail a few of the initiatives investors can look forward to in the near future.
One of the more compelling steps Twitter is taking down the growth path is a new partnership with Flipboard and Yahoo! Japan. Agreements reached with both of those companies will allow Twitter to push advertisements — what it’s calling “promoted tweets” — onto their websites.
Also, Google Inc. (NASDAQ:GOOGL, NASDAQ:GOOG) and Twitter recently came to an accord that will display tweets in the search engine’s results pages almost in real-time.
Twitter isn’t just relying on new or enhanced business relationships to continue its growth, however. Newcomers to the Twitter home page see a new design that the company expects to converts more browsers into Twitter users. The company is also testing an instant timeline, which will allow new users to see what the Twitter community is saying without first requiring them to follow other Twitter users.
CEO Dick Costolo has also recently pointed out his company is working on some new group chat and video-oriented features.
Bottom Line for TWTR Stock
Even in the shadow of the encouraging Twitter earnings news, nobody’s going to give the company’s stock any value awards. TWTR stock still trades at a frothy forward-looking price-to-earnings ratio of 121.3 and a similarly frothy forward-looking price-to-sales ratio of 21.8.
Even if sales grow more than expected this year there’s still no chance the stock could be considered “worth it” by typical valuation norms — but Twitter isn’t an “investment”. It’s a trade and always has been. Growth rates supersede valuations for most so-called story stocks, and TWTR stock is no exception.
What about slowing user growth? Sure, it would be great to see beefier user growth from Twitter. Given the choice between near-100% revenue growth and a decisive swing to profit versus more users that may or may not bear more revenue, most traders will rightfully focus on the swelling income statement.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
