For an erstwhile beloved social media stock, Twitter (TWTR) just cannot seem to do anything right in the eyes of either Wall Street or investors nowadays.
Despite Twitter’s 2% gain on Wednesday, TWTR lost 11% within the last ten trading days (down 28% YTD), with much of the damage coming after Detwiler Fenton’s Alex Arnold pointed out that Twitter’s 66 million monthly active users in the U.S. were close to hitting a peak.
Arnold’s comments came hot on the heels of a post-earnings hammering of Twitter shares after the company delivered healthy third-quarter 2015 earnings that managed to beat estimates on both the top and bottom line, but issued soft guidance far under consensus estimates.
For the record, Twitter reported revenue of $569.2 million, good for a healthy 58% year-over-year growth. Non-GAAP net income of $67 million, or 10 cents a share, was actually double consensus estimates for the company. On a GAAP basis, however, it was yet another quarter that Twitter finished in the red after reporting a loss of 20 cents per share.
It was Twitter’s guidance that, once again, did the damage to Twitter stock. Twitter said that it expects fourth-quarter revenue to clock in the $695 million to $710 million range, well below consensus estimate of $739.7 million.
Meanwhile, Twitter users in the U.S., the key theme in Arnold bear thesis, came in flat quarter-over-quarter; only 2 million better compared to Q3 2014, which was the worst growth posted by the company so far.
It’s quite obvious that no company, including the most successful, can continue growing users indefinitely. After all, the world’s population is expanding at just a 1.1% clip.
Nevertheless, Twitter faces a unique problem here.
An Odd Dichotomy in Twitter
A closer look at Twitter’s revenue distribution by geography reveals just how heavily the company relies on the U.S. market to drive growth.
TWTR boasts 66 million users in the U.S. and another 254 million users overseas. But here’s the punch line: Twitter makes 65% of its revenue in the U.S. with the rest of the world contributing just 35%. Looked at in another way, the average U.S. user brings in about 7.4 times as much revenue as the average international user.
Comparing Twitter to Facebook (FB), you notice that Facebook’s revenue distribution is skewed much more equitably in its domestic and international markets than Twitter’s. Facebook finished the third quarter with 217 million MAUs in the North American market and another 1.283 billion in the other parts of the world.
The average North American Facebook user brings in about 5.7 times as much revenue as the average user in the rest of the world. But with 51% of FB’s revenue coming from international markets and the North American market contributing 49%, Facebook’s revenue distribution is much more favorable compared to Twitter’s. A slowdown in domestic user growth is therefore likely to be felt much more keenly by Twitter stock than FB.
The negative impact on Twitter’s top line is, fortunately, not likely to be felt any time soon since Twitter has been successful at squeezing more money from its existing users.
During the last quarter, Twitter users in the U.S. grew just 3% YoY, yet the company’s revenue in this geographical segment jumped 54%. The story was the same in international markets where MAUs grew 13% YoY, yet revenue grew 65%.
So while a slowdown in user growth is likely to cause jitters, it does not automatically signal that the beginning of the end for Twitter stock.
Bottom Line
When it comes to social media companies, investors tend to attach a lot of importance to user growth.
While user growth certainly plays a big part in driving overall growth for a company, it’s not the only way that a company can expand its top line. Twitter’s domestic user growth has almost dried up, yet the company is still growing at a healthy clip.
Twitter stock should therefore not be held down by these worries.
Investors should perhaps be more concerned about Twitter’s continued lack of profits.
If Twitter’s top line growth should slip to within the 30% range (likely to happen in about two years due to the law of large numbers) while remaining unprofitable, then you can be sure that TWTR stock will find itself in a world of pain.
As of this writing, Brian Wu did not own any of the aforementioned securities.
