Twitter Stock Plummets as Social Media Earnings Fallout Continues

TWTR stock - Twitter Stock Plummets as Social Media Earnings Fallout Continues

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Although the two social-media giants often clash, an entire galaxy could have separated Twitter (NYSE:TWTR) from chief rival Facebook (NASDAQ:FB). The former was on a believable recovery path after faking out bulls in prior attempts. Ahead of its second-quarter 2018 earnings report, TWTR stock was up over 78% year-to-date. The latter tanked 19% off a disappointing Q2.

While I had a difference of opinion regarding how the Facebook earnings report should be perceived, the result was undeniable. Wall Street absolutely hated what they saw and heard and punished FB shares accordingly. Now, a 19% single-day loss isn’t unheard of, but when you’re Facebook, those losses amount to serious dollars.

We’re talking $120 billion of market capitalization evaporated in less than seven hours. That is a profound record: no other American company has lost so much over one trading session. To put this into further perspective, the market cap for TWTR stock prior to Q2 was just over $32 billion.

Theoretically, with what FB lost, you could buy Twitter three times over (its market cap is now $27 billion) and use the remainder to buy a sizable stake in Snap (NYSE:SNAP).

But can TWTR stock advantage Facebook’s dubious record-shattering? While Twitter enjoyed better sentiment than its rival, the company still suffered from investor anxiety prior to earnings. Between mid-June to the earnings conference call, shares gave up 6% in the markets.

One of the big reasons for the cold feet was the fake accounts issue. Possibly, up to 70 million fake accounts were created, which led to the obvious follow-up: did any of these artificially raise the official subscription number?

Management denies it, which of course would crater TWTR stock if true. That said, the issue presented a dark cloud ahead of the Q2 conference call.

TWTR Stock Plummets After Posting Weak Earnings

As it turned out, fake accounts had no impact on Twitter’s earnings results. Management purging these accounts occurred after Q2 closed. Unfortunately, the social-media malaise still got the better of TWTR stock when the underlying firm posted disappointing numbers.

The Street consensus pegged earnings per share at 17 cents, which was near the higher end of estimates. They ranged from 9 cents to 23 cents. Actuals merely met expectations this time, as opposed to the year-ago quarter, when Twitter managed a 60% positive surprise.

The revenue picture provided a better read. Going into the Q2 report, covering analysts had consensus at $696.2 million. The social-media firm rang up $711 million, pulling off more than a 2% surprise. One year ago, Twitter delivered $574 million, meaning that it managed nearly 24% top-line growth.

While the sales haul was impressive, it alone couldn’t save Twitter stock from the ramifications of poor guidance. Management downgraded full-year expectations to below what they reported in Q1 2018. Wall Street quickly turned sour on what had been their recent Cinderella story. As of this writing, Twitter stock is down 18%.

Perhaps the worst part about the earnings disclosure, though, was subscriber growth. Twitter reported 335 million monthly active users (MAUs). This was down 1% from the consensus 338 million target. The miss was further disappointing because, in Q1, the company reported 336 million MAUs.

Management quickly offered explanations. The social-media firm didn’t secure paid-SMS carrier relationships in some markets, which hindered Twitter access. Moreover, the company focused on format changes which took time away from marketing efforts, and they had to comply with new European internet privacy guidelines.

TWTR Stock Versus FB Stock: Which Is the Better Contrarian Buy?

Now that both social-media firms have released their lackluster Q2 results, which is the better contrarian buy: TWTR stock or the venerable Facebook?

On one end of the corner, we have Twitter, President Trump’s favorite social media platform. But more than just a place to catch up on political humor, Twitter earned credibility from its recovery efforts. Management has focused on improving the overall experience with video and streaming content. The updated format also makes Twitter more attractive for advertisers.

Despite Q2 disappointments, the evidence was there: advertising revenue was $601 million, up 23% YOY. Also, data licensing and other revenue increased 29% from one year ago.

On the other end stands the always-formidable Facebook. Despite the market fallout, Facebook’s total sub growth had slowed; it didn’t flatline, and it most certainly didn’t go negative. On a year-over-year basis, its daily active users increased 11% to 1.47 billion.

In the end, I’m giving the edge to Facebook. Both FB and TWTR stock experienced similar share-price collapses immediately following their earnings reports. However, Facebook has already conquered almost every demographic segment; they’re now shifting their strategy to take over the rest.

In contrast, Twitter has a much smaller subscriber base, yet they couldn’t make progress. That’s also unusual given that the company has markedly fewer controversies than Facebook. As I mentioned, fundamentally, the recovery story is still in play, and therefore, TWTR stock remains a contrarian opportunity. I just like my money better on the more proven Facebook.

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

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