Welcome to the club, Twitter (TWTR). You’ve just joined the ranks of hot IPOs that at some point or another couldn’t handle the Wall Street earnings confessional.
TWTR stock was getting beat up hard in after-hours trading Wednesday, first enjoying a boost of as much as 7% before falling back to earth. As of this writing, Twitter stock was down 17%.
At least Twitter is in good company.
Facebook (FB). LinkedIn (LNKD). Yelp (YELP). While all have experienced varying levels of success, each has disappointed in at least one of their quarterly reports — not necessarily in earnings, but in some aspect of the announcement.
Twitter stock didn’t just go public in November — it was shot out of a cannon, running up more than 150%. Despite the success, Wall Street was full of skeptics. Ahead of the Q4 report, just seven of 31 analysts covering TWTR stock had “buy” ratings on the company’s share. There were more sell ratings, in fact — 11 — and many came from the very companies that had underwritten the IPO!
So what went wrong?
TWTR Earnings: Pretty Good, Actually
Fourth-quarter earnings for Twitter were actually pretty promising, and the company showed rapid improvement in monetization. Revenues soared by 116% to about $243 million, which trumped Wall Street estimates for $218 million. That was driven heavily by mobile, which accounted for three-quarters of ad sales.
Twitter also reported actual earnings — 2 cents per share, vs. Wall Street expectations for a 2-cent loss.
Those results came in part thanks to Twitter’s hard work in creating new ad products and systems. During the quarter, it rolled out TV Conversation Targeting, Tailored Audiences, Conversion Tracking and Promoted Accounts in Timeline.
TWTR also has been mindful of improving overall ease of use, adding features to the core Twitter app. The company has included Twitter Alerts, swipes between timelines and the ability to send/receive photos via direct message. Twitter also has pushed the Vine video-sharing app, and expanded it to support 19 different languages.
However, all this success is masking an underlying problem: User growth isn’t exactly up to snuff.
Twitter added just 9 million monthly active users in Q4 (1 million in the U.S.), putting its total at 241 million. The increase came to a meager 3.8%, which was far off Q3′s 6.4% user improvement. Meanwhile, the MAU total was well off the 250 million-plus total that Wall Street expected thanks to factors like the holiday season and the buzz around the Twitter IPO.
To put things in perspective, Facebook — itself dogged by growth worries before its recent earnings report — added 39 million MAUs during the same period. That’s 16% of Twitter’s user base.
So now, a nagging issue that becomes even more pressing is whether Twitter will reach the global scale necessary to become an absolute must-have option for mobile advertising. If the MAU growth ramp continues to erode, Twitter has a serious problem on its hands.
Moreover, TWTR is also showing signs that engagement is trailing off. Timeline views (which is when a person takes a look at the feed) actually suffered a quarter-over-quarter decline, from 159 billion to 148 billion.
While Twitter clearly is doing a better job of monetizing its user base, investors now must keep their eyes on the user base itself. Watch the company closely for activity meant to boost the overall user base, as well as features meant to keep users more engaged.
Without it, Twitter might find itself shy on scale, and TWTR stock investors will find themselves suffering more days like today.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.