Twitter Inc (NYSE:TWTR) stock was severely punished last week, plunging more than 14% on Thursday, even though the embattled social media company not only beat analysts’ second-quarter forecast on both the top- and bottom-lines, but it also issued strong third-quarter guidance. Did the market overreact to TWTR stock or is this a buying opportunity?
TWTR stock, which was up some 20% ahead of the announcement, closed Friday at $16.29, losing all of its year-to-date gains. The shares are now down 2.2% year-to-date, trailing the near-10% rise in the S&P 500 index.
The beat on the bottom line wasn’t enough to dispel fears about Twitter’s inability to monetize its user base, which caused advertising revenue to fall 8% year-over-year.
TWTR Stock: Another Head Fake
The biggest problem, however? TWTR delivered flat user data growth, suggesting that the election-related boost it received in the first quarter was an aberration. The company reported 328 million monthly active users (MAU) for the second quarter, which not only was flat on a sequential basis, but it also fell short of Street expectations for 332.5 million monthly average active users.
And although daily active users rose 12% YOY, Twitter registered just 68 million monthly users in the U.S., which marked a decline of 2 million from last year. By contrast, Facebook Inc (NASDAQ:FB), during its second quarter, added 70 million users worldwide and two million users in North America. Aside from the weak user growth metrics, the company’s second-quarter advertising revenue fell 8% YOY to $489 million, though it marked a slight improvement from the 11% decline in the first quarter.
Overall, this quarter was yet another massive disappointment to investors, who have suffered significant losses over the past several years. Admittedly, there was a point that I believed that Twitter’s efforts, including its conscious push into video, were starting to pay off. I also wagered that the company would see increased traction over the next few quarters, if for no other reason than the fact that President Trump loves the platform.
Where Does Twitter Stock Go From Here?
Clearly, I was wrong. And management did little to assure TWTR stock investors that the company has a timetable to fix its problems. “We do not expect to see our total revenue growth rate improve in the second half of 2017 due to headwinds in the second half (of approximately $75M) associated primarily with de-emphasized revenue products. On a normalized basis (excluding the impact of these headwinds) we could see an improvement in total revenue growth by Q4’17,” TWTR said in the shareholder letter.
Indeed, stagnant user growth should be high on the list of things the company must fix for Twitter stock to rise again, but it must also develop a sound strategy to monetize its platform. Management has outlined plans to revamp the company’s revenue products, including nixing various failed revenue drivers.
Likewise, in an attempt to better compete with Facebook, TWTR want video to be the focus of its product offering, which the company hopes will not only drive higher user engagement, but also revenue.
As one of the largest social media platforms in the world, Twitter — despite saying all of the right things — hasn’t put up the growth metrics Wall Street needs to see before assigning TWTR stock with a higher multiple. This is true, even when you compare the stock to Snap Inc (NYSE:SNAP).
As to whether Twitter stock should be bought on this pullback? It all depends on the extent to which you believe the company can grow its user base and monetize the platform. CEO Jack Dorsey, who many analysts believe has worn out his welcome, has promised to fixed these issues. To date, he has yet to deliver. And, at this point, it may take a management change or some level of investor activism to extract the value that can be unlocked from this company.
Bottom Line for TWTR
The long-term risk-versus-reward potential of Twitter remains a strong topic of debate, but TWTR stock seems more attractive at these levels than they were a month ago. That said, there’s also limited upside from here given that the company’s user base has stalled.
Plus, there are too many things that need to go right for Twitter stock, which is nothing more than an M&A play at this point, to regain Wall Street’s trust.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
