This nonsense with Twitter (TWTR) has got to stop.
After looking at the latest Twitter earnings report, I had to laugh. Then I laughed even more as I see TWTR stock up 25% in premarket trading.
Why? Well, let’s hit on a few numbers from the Twitter earnings report, interpret them, and then I’ll give you my impressions of TWTR stock, and why the market is way wrong on this one.
One thing analysts seem to think is important in Twitter earnings — and I suppose it’s because there’s really very few other ways to measure Twitter’s value — are its user base and timeline views.
Apparently, 271 million users logged in “at least once,” which was a 6.3% uptick quarter-over-quarter, and a 24% increase year-over-year. This resulted in 173 billion timeline views, meaning the number of times viewers refreshed their timeline.
Then again, Twitter CEO Dick Costolo attributed some of this to the World Cup — at least, he said the World Cup drove engagement, though not the actual number of users.
Still, the World Cup is the planet’s most popular sporting event. It’s hard not to consider any results driven by the tournament to be a little anomalous.
Twitter revenues came in higher than expectations, at $312 million vs. $283 million — another win for TWTR. There’s not too much salt to throw on that, except to say that 81% of ad revenue comes from mobile advertising, and that’s hardly a diversified revenue stream.
Lastly, the company reported adjusted earnings of 2 cents per share, which beat estimates for a penny loss and which were far better than last year’s adjusted 12-cent loss. Again, positive, but it should be pointed out that including various items, TWTR suffered a net loss of 24 cents per share … still better than last year’s 32-cent unadjusted loss, but still nothing to crow about.
So, what exactly is the monetization play here?
Twitter can be great for mega-events and emergencies, but the questions I ask myself are do people use it for something else, and can they be monetized?
One metric I think is very telling in that regard is that while mobile users increased, the amount of time spent on the mobile app declined from 9.2 minutes per day to 7.2 minutes per day.
Right now, advertisers generate Twitter’s revenues. The problem with an advertising-driven company is that ad spend is not going to be reliable. Many people don’t pay attention to the ads, and even find them to be a nuisance. What really matters is which ones are converted into sales.
You can only do so much with ads on Twitter. It’s not like you can have a splashy cool ad, a comedy skit, or some eye-catching headline to generate the click-through. (And admittedly, it’s not just Twitter — I know I’m annoyed by the Facebook (FB) app that jams an ad in my news feed second from the top.)
I think companies, and especially ad agencies, see the popularity of social media outlets like Twitter and Facebook and believe they must have a “social media” strategy, so they just throw money at advertising on those platforms. But no one’s quite sure just how effective they are, or what the best way is to reach people through mobile.
Unilever (UL) CMO Keith Weed said as much when talking about the difficulties facing marketers today, and referred to the mobile advertising landscape as “chaos.”
The next financial crisis that rolls around, or the next recession, will cause companies to restrict ad budgets. When they get a look at their conversion rates, I think social media advertising will dry up.
But let’s even say, for the sake of Twitter, that it doesn’t. In that world, I’m still supposed to take a 2-cent operating profit and extrapolate that to a $29 billion market cap?
Folks, TWTR stock is the very definition of a momentum stock. This isn’t for investors. This is for traders.
If you want to bet, by all means. For instance, you can bet on what might happen.
I wouldn’t be surprised if some large media company will decide they must own Twitter for no other reason than to own it, and they’ll one day buy TWTR stock out for vastly more than it’s worth, like Priceline (PCLN) did with OpenTable (OPEN).
Of course, I also wouldn’t be surprised if Twitter suffered from mean reversion in its next earnings report, and all this frothiness died away.
My advice: Don’t get caught with your pants down when either of those events happen.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.