Twitter recently released its earnings for the second quarter on Tuesday evening and while there was a surprisingly significant increase in revenue and higher-than-expected bottom line, I’d speculate that the overall report was a #letdown. Twitter is a high-profile stock; it has a very high valuation and a large market exposure, but continues to lose money. Revenue was $502 million, while Twitter’s net loss amounted to $137 million, a loss of 21 cents per share. Hashtag, bummer.
Investors considering Twitter have two primary concerns: active users and profitability. When it comes to social media, two specific statistics are important in gauging a platform’s success: the number of users and the users’ engagement. Twitter’s user growth has been extremely unimpressive. In the second quarter, the number of users in the US remains stagnant and the user count grew by only 2 million internationally. The interim CEO, Jack Dorsey, alluded that there are plans to make Twitter easier to operate in order to entice more users. There are also plans to improve interactions to make the users more engaged. Unfortunately, large fundamental changes take time and these changes take even more time when a company lacks disciplined product execution. It is likely that these changes will not be effective for, what Twitter’s CFO Anthony Noto deems, a “considerable” amount of time.
What makes me nervous about Twitter is that it really isn’t making enough money; revenue is growing, but not nearly enough. The cost of revenue, along with general and administrative costs, are currently consuming all of the revenue that Twitter manages to generate and then some! There needs to be improvement in the ability to monetize its exposure. Basically, Twitter should engage its modest user base and develop a structure that generates some regular profit. One thing that Twitter may due is play to its strengths as a media distribution platform and capitalize on live events such as sports, politics, and others. Also, part of the restructuring that needs to take place is an improvement within the ad-platform to benefit both Twitter and the advertisers.
Just as a simple sidebar: it may be a little difficult to foster fundamental changes when two key product executives have left the company: Todd Jackson, Director of Product Management, left to join Dropbox and Christian Oestline, Vice President of Product Management, left to join Google. Here’s to hoping Mr. Dorsey can get a solution to that issue squared away (pun totally intended).
I think Twitter’s high valuation is hard to explain. Twitter has a market cap of nearly $25 billion, despite its inability to generate positive cash flows. The only thing saving the price of the stock at the moment is investors’ hopes that fundamental changes will be extremely profitable. However, Twitter's recent slip along with other comparable companies really bring to question if we are analyzing their value correctly to begin with.
On a colloquial note, I really enjoy watching companies like Twitter, primarily because I find it intriguing to track investor sentiments. Some companies may have a bad quarter or experience a slight shift in consumer sentiment, and the stock immediately falls out of favor despite having a solid balance sheet and generous cash flows. Then there are companies like Twitter; that are provocative and risky; they incite excitement and fail to provide evidence of long term prosperity. Call me old-fashioned, but I like to see a company prove its worth and then eventually invest, rather than invest and hope that a high-value hunch is eventually proven.