To say the past three months have been bullish for Twitter Inc (NYSE:TWTR) would be an understatement. Between April’s low and Wednesday’s close, TWTR stock gained roughly 40% — one of the stock’s best runs since its post-IPO surge in late-2013. Better yet, shares have stopped logging lower major lows, and are on the cusp of a new 52-week high.
Needless to say, the market clearly was expecting compelling results headed into the company’s second-quarter report, posted Thursday morning.
The market didn’t get those compelling results — not on the one front it needed them the most. And as a result, TWTR shares are getting pounded by nearly 10% in early trade.
Twitter Q2 Earnings Recap
The good news is, for the quarter ending in June, Twitter turned $574 million worth of revenue into an operating profit of 12 cents per share. Analysts were only calling for sales of $548 million, down from $602 million in the second quarter of 2016. Those same pros were also looking for earnings of 5 cents per share of TWTR stock, down from 13 cents per share a year earlier.
Perhaps more important is the bad news: Twitter reported 328 million active monthly users.
Whether 328 million monthly active users (MAUs) is a victory or a failure is largely a matter of perspective. On a year-over-year basis, it’s 5% better, but it’s not one iota better than the first quarter’s user headcount. Almost as troubling is the fact that the growth rate of the microblogging site’s daily active users (DAUs) slowed from Q1’s 14% to 12% this time around.
Slowing user growth has been a bigger concern for current would-be Twitter shareholders than a lack of real profits — Twitter booked a GAAP loss of $116.5 million in Q2, though that loss was pared back to only $66 million when stripping out a one-time impairment charge. Indeed, and as was noted, the stock has been rallying firmly since the company’s Q1 report despite expectations for slumping sales.
The premise is, as long as Twitter site continues to add users, enough bulls are confidence the revenue will materialize, and eventually drive profits. Now, current and would-be TWTR stock holders don’t even have that hope to hold onto.
Not-So-Great Expectations
A few other notes: Cost per engagement was down more than 50%, while total ad engagements grew 95%, year-over-year. Sure, the report wasn’t disastrous. But Twitter shareholders have been patient enough already.
The company has been up and running since early 2006; if Twitter has yet to find a meaningful winning, reasonably profitable growth formula — and it hasn’t — an increasing number of investors are justified in wondering if it’s because there simply isn’t one.
Morgan Stanley analyst Brian Nowak is one of those doubters. Prior to the release of the company’s Q2 report, Nowak reiterated his $10 price target on TWTR stock, noting:
“We remain (underweight) TWTR as we have not heard of any material change in advertiser intent to spend in the near term and continue to see negative revision risk to (the second half of 2017) and 2018.”
There was nothing in last quarter’s numbers to suggest Nowak’s pessimism is unmerited.
In fact, earlier this year, William Blair analyst Ralph Schackart penned similar concerns, explaining that his sources in the internet advertising industry had plans to spend more advertising dollars at rival Facebook Inc (NASDAQ:FB) this year, and less at Twitter. It’s just a matter of greater reach and more targeted marketing via Facebook. And, it’s increasingly more about mobile, where Facebook is also winning the war.
The rhetoric changed a little in June, when Cleveland Research reported advertisers’ opinions of Twitter were the highest they’d been in a couple of years. Even then, Twitter can’t pay current bills with forward-looking optimism.
And shrinking its way to viability by culling its per-engagement costs less dramatically than its lowering its advertising rates doesn’t help.
Looking Ahead for TWTR Stock
Twitter doesn’t offer much in the way of guidance. The company is looking for adjusted EBITDA of between $130 million and $150 million for the third quarter, and adjusted EBITDA margins of somewhere between 25% and 26%, down a bit from Q2’s rate of 31%. That doesn’t compare favorably. Last’s year’s total EBITDA was $751.5 million, or right around 30% of revenue, and Q3-2016’s EBITDA margin rate was also right around 30%.
Analysts have a more detailed bead on the company’s fiscal trajectory, however, and they’re not looking for much improvement in the foreseeable future on other fiscal fronts.
For the quarter currently underway, the pros are looking for a 7.5% lull in year-over-year earnings, and a near-halving in per-share profits. In fact, analysts collectively that degree of tepidness to persist through all of 2017.
The following year is a slightly different story.
The pros are projecting single-digit sales growth, and calling for earnings to grow from 2017’s expected operating income of 34 cents per share to 39 cents per share. That down-the-road outlook has largely inspired the stock’s near-term bullishness.
The recent buyers may find the time needed to get from here to there, however, may be longer than most of the newcomers are willing to wait. Today’s weakness in TWTR stock underscores that idea.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
