As I write this Twitter Inc (NYSE:TWTR) is up 25% since announcing better-than-expected user growth in 2017’s first quarter. Investors, excited about any good news at the social media company, bought and sold 79.3 million shares of Twitter stock April 26, five times the daily average.
Briefly recapping earnings, Twitter’s monthly active users (MAU) rose 6% to 328 million, seven million higher than analysts were expecting.
In more good news, Twitter lost $61.6 million in the quarter, 22.7% less than a year earlier. However, it did see revenue decline 7.8% year-over-year to $548.3 million, and net income on a non-GAAP basis drop 19.8% to $82.4 million on lower Twitter stock-based compensation.
“We’re delivering on our goal to build a service that people love to use, every day, and we’re encouraged by the audience growth momentum we saw in the first quarter,” Twitter CEO Jack Dorsey said in its earnings release. “While we continue to face revenue headwinds, we believe that executing on our plan and growing our audience should result in positive revenue growth over the long term.”
Dorsey is upbeat about the company’s progress to meet its advertiser’s needs. So far it appears investors are buying both the CEO’s story and Twitter stock. The double-duty CEO talks a good game, but delivering the company’s first quarterly drop in revenue (expected by analysts) is something to keep an eye on as the fiscal year rolls on.
Twitter Has More Users Now what?
Well, as I said on April 25, I need to know more about how it’s going to translate user growth into revenue growth. Yes, its 6% year-over-year growth in MAUs is better than both the 4% growth in Q4 2016 and the 3% growth in each of the first three-quarters of fiscal 2016. However, if it’s not turning that growth into dollars, investors will move on from TWTR stock to something that is generating profitable growth.
I believe that Twitter’s best chance of success is to bring out a paid version of the platform. Sooner rather than later. In my previous article about Twitter, I mentioned that a paid version could deliver $2.3 billion (319 million MAU multiplied by 3% subscription buy-in multiplied by $240 per year) in additional annual revenue. With the bump to 328 million MAU, that increases the potential revenue to $2.4 billion annually.
Unfortunately, not much was said in Twitter’s conference call about a paid version of TweetDeck or a timeline.
“We’re testing new sources of revenue from areas that have significant activity on Twitter already,” COO Anthony Noto said in the conference call. “There was news about a test that we’re doing for TweetDeck. It has a very loyal audience. It’s an audience of size. Is there an opportunity to deliver incremental value to all the TweetDeck users through different forms of monetization.”
Noto, however, did indicate that its data business is one of its fastest-growing businesses generating $2-$3 in other revenue for every dollar of data revenue. The data business ties in with a paid version of Tweetdeck which would provide businesses with much better data analytics, etc.
Twitter is holding its cards close to its chest, which isn’t a surprise. I was just hoping for a bit more clarity on this issue. Maybe we will get further information by the end of the second quarter in June.
Bots and Trolls
Both of these subjects got addressed in Twitter’s conference call which is good.
“In regards to bots that are more targeted to spam, we regularly work to detect and shut these down, and we found that less than 5% of Twitter accounts are spam related,” Dorsey said in conference call. “But we’re always testing our tools and continuing to invest in machine learning and deep learning tools to make sure that we better address any spam vectors or any fake accounts in that sense.”
A recent study by University of Indiana and University of Southern California researchers estimates that 15% of Twitter’s users are bots or non-humans. Dorsey’s number is much lower, which is good news on the fake accounts front.
As for the trolls on Twitter, Jack Dorsey said it continues to make progress eliminating abuses.
“We committed to reducing abuse on Twitter, and we’ve made significant progress,” said Dorsey:
“In the past two months alone, we’ve released a series of product features and machine learning models, and as a result, we see a significant decrease in people experiencing abuse on Twitter as measured by reports and blogs. There’s lots more to do, but we’re on the right path.”
These two issues, while ongoing, do appear to be getting straightened away. Reduced spamming and abuses is encouraging news for anyone owning or considering TWTR stock.
Bottom Line on TWTR Stock
I would have liked a lot more transparency on the TweetDeck issue, but no such luck. The confidence Dorsey and Noto displayed during its conference call, however, suggests now might be a good entry point to buy TWTR stock.
My big concern with owning TWTR is that analysts project year-over-year revenue will decline in fiscal 2017. Unless it can figure out how to squeeze more profits out of its revenues, Twitter’s got no chance of making money on a GAAP basis in 2017, or perhaps even in 2018, making its current 4.7 price-sales ratio a little pricey.
If you can stomach a few quarters of declining revenue, I don’t see a problem taking a small position at this point.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
