3 Ways That Twitter Inc Earnings Tricked Investors (TWTR)

It didn’t take the market long to realize that Twitter Inc‘s (NYSE:TWTR) rosy earnings weren’t worth anything close to the pop that TWTR stock received at the market’s open.

3 Ways That Twitter Inc Earnings Tricked Investors (TWTR)

If anything, they only confirmed the obvious: Twitter is in deep trouble.

The headline numbers surprised to the upside against muted expectations, but investors and analysts wouldn’t have been shocked if the quarter had turned out to be a disaster for the social media platform. That combination lit a fire under TWTR stock for a short while.

Twitter stock rose more than 5% at one point in premarket action and opened the regular session by popping 3%. It didn’t last long once the reality set in that the continuing deterioration in TWTR’s fundamentals was the real story of the quarter.

Twitter might be able to squeeze out a profit next year after laying off 300 employees and shutting down Vine, but those are purely defensive moves. It’s management by arithmetic.

Here are three reasons why Twitter earnings are not what they seemed:

Top-Line Pain for TWTR Stock

What Twitter needs is user growth and better monetization of what base it already has. Nothing indicates that’s in the cards. As Wedbush Securities analyst Michael Pachter told Reuters:

“The building blocks for revenue are increasing the number of users, and Twitter is not doing a particularly good job of that.”

Pachter notes that Twitter needs to grow revenue by $200 million to $300 million a quarter to become profitable next year. Analysts polled by Thomson Reuters project TWTR revenue to increase by about $300 million for the entirety of fiscal 2016. The forecast for all of fiscal 2017 is about the same.

Twitter would need a miracle to generate that kind of acceleration in top-line gains.

“Better Than Expected” Isn’t the Same as “Good”

Be that as it may, Twitter’s user growth did top analysts’ forecast. Given its centrality to TWTR’s existential problems, that sounds pretty great. TWTR stock getting a little love for the beat is not surprising.

Keep in mind, however, that the user base grew just 3%. Twitter now claims 317 million average monthly users. That’s not going to cut it. Indeed, it’s dwarfed by the digital-ad duopoly of Alphabet Inc‘s (NASDAQ:GOOG, NASDAQ:GOOGL) Google and Facebook Inc (NASDAQ:FB). Facebook has 1.7 billion active users. Google search claims 1.2 billion users.

And that’s not even considering what fresher upstarts are doing to TWTR’s prospects. Facebook-owned Instagram counts more than half-a-billion users. SnapChat and Pinterest are hot properties too. Those are the places advertisers want to be.

No Savior for Twitter

Well, that was awkward. Twitter put itself on the shopping block and was rejected by top players in more than one sector.

Salesforce.com, Inc. (NYSE:CRM), Walt Disney Co (NYSE:DIS) and Google were said to have the most interest, but guesses extended to Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) and Verizon Communications Inc. (NYSE:VZ), too. Not one of them made an offer.

The argument is that someone wants TWTR, just not at the current price. Fine. But how far is TWTR going to have to slide to make it palatable to an acquirer? It sounds like a lot. Here’s Pachter again:

“The run-rate for the year is under $100 million in profit, so it is really hard to justify spending $15 or $18 billion to buy a [company with] $100-million profit.”

Twitter stock is having a reasonably nice response to quarterly results. Just don’t get used to it. The bigger story remains the same. Twitter is in trouble.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/10/twitter-inc-twtr-stock-earnings-ipmedia/.

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