The market seemed very upbeat regarding the first-quarter earnings report out of Twitter Inc (NYSE:TWTR) because it beat estimates. TWTR stock is up 10% in two days, so Wall Street clearly sees something it likes.
Personally, I’m not thrilled about the specifics, but let me walk you through Twitter’s Q1 report and see just what is good and what is not so grand.
Revenue came in at $548 million, which is a terrible number no matter which way you slice it. That’s an 8% decline, which is the first year-over-year decrease Twitter has ever posted.
Worse, this came on an 11% decrease in advertising revenue. While data licensing was up 17% to $74 million, it only represents about 15% of total revenue, so I see nothing to get excited about there.
Everyone was jumping up and down on TWTR stock after the earnings beat, but did they even see this revenue decline? Or did they see the 10% decline in expenses that helped contribute to the beat? Or did they see that those declines were actually offset by having to rev-share more money on some content?
Twitter put up an operational loss of $40.3 million, which was an improvement over last year’s $59.1 million. But, when you look at the P&L, the reason for this is because TWTR spent $27 million less on research and development, and $66 million less on sales and marketing.
I’m struggling to figure out why this is special in any way. If profitability depends on how much or little one opens the expense spigot, while revenue is declining, I’m skeptical about the entire business model.
Besides, “beating” the estimates by “only” having a $61.6 million loss only goes to show how frothy and stupid the stock market is right now. Oh, and TWTR stock was diluted by another 4.5%, since shares outstanding increased from 691 million to 722 million.
The one piece of good news in the financials is cash. Operating cash flow improved from $162.7 million to $203.4 million, and TWTR is stacked with $3.9 billion in cash, cash equivalents and marketable securities.
What’s particularly disconcerting is that these revenue declines occurred despite an increase in total daily active users (DAUs) by 14% year-over-year, which compares very nicely to 11% in Q4 of FY16, 7% in Q3, 5% in Q2, and 3%. This trend is happening globally. But the fact that it isn’t boosting revenue is pretty depressing.
Twitter stock jumped about 8% in one day on this “great news.” It’s up another 3% today.
What to Do About TWTR Stock
I continue to hold to my thesis that Twitter is not really an investment, but a trading vehicle.
From a fundamental standpoint, if Twitter wants any chance, it needs to get Tweetdeck rolled out and generating subscription income. That will help with advertisers that need content management, expert trend analysis, the ability to manage multiple accounts, more flashy publishing features and so on. But it won’t hold regular consumers any more than the current platform does, because it doesn’t offer them anything.
As I recently wrote, “Twitter is really more of a lark for many people. They can live without it. That’s the ultimate challenge for TWTR stock. Twitter needs to make itself indispensable, and if the company hasn’t figured out how to do that yet, it’s not going to. Unless it hires someone who truly has a vision.”
That puts Twitter in a strange place because it has tons of cash. It can do a lot of things if it figures out what those things are. That’s why I mentioned that Twitter needs a visionary to take over. It needs that Steve Jobs to see potential for the platform that nobody else has even figured out, and then execute on that plan.
That Twitter has been around for so long and nobody seems to be stepping up may be the long-term story for TWTR stock … and why I wouldn’t own it as an investment.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.