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Ahead of the Twitter trend

Twitter’s Q4 earnings report was issued this past Wednesday after market close and it wasn’t pretty. A recent Bloomberg article pointed out that revenue growth and user growth rates are at a standstill[1]. What’s most interesting is the fact that this has garnered so much attention in the press as if everyone is surprised by the fact that Twitter could perform so poorly.

In a previous post, titled ‘What Search Trends Means for Twitter Stock’ we described what we felt was waning interest in the platform and negative outlook for the company’s financial fortunes. We particularly pointed out that even for the countries where management expected user growth to outpace the negative trend in the U.S., that those countries also reached a peak and thus would impact the company’s financial performance. Judging by the most recent quarterly performance and management comments, we’d like think that we weren’t that far off.

So how exactly can we get a sense of waning interest in the platform?

Assuming you’re a new user or a company looking to market on Twitter for the first time, it is likely that a segment of you may start off with a Google search for the term ‘Twitter’. A continued uptrend in searches for ‘Twitter’ would suggest an increasing number of individuals looking to learn more and possibly adopt the platform while a decreasing trend would mean the opposite.

We point out that worldwide search trends for the term ‘Twitter’ have been down trending and most recently fell to a low not seen since January 2011. Keep in mind that google search data is normalized, which means that a drastic drop in searches in countries where the total number of searches for the term were not that large to begin with, could skew the worldwide search trend. But even if you were to isolate for searches in the countries where Twitter earns most of its revenues or even those countries where Twitter expects user growth to outpace its U.S. market (Argentina, Brazil, France, India, Japan and the Philippines), we see that in either of the cases, the trends are all negative, further hinting towards a flatlining or declining user growth rate.

2017-02-12_twitter_gt_worldwide

What does this mean for Twitter’s Quarterly Performance?

Since the company has never made a profit, we’ll focus on revenues first. For the 4th quarter, the company came in with $717m, about $7m more than the same time last year, that’s a little less than a 1% increase. Considering that during the period they were handed a trump card in the form of a controversial Twitter user and presidential candidate of the same name, but were still unable to see revenues grow in a meaningful makes the performance appear that much worse.

We stress the same concerns with the Monthly Active User (MAU) metric which saw a 0.6% increase from the prior quarter and a 4% increase year over year. Management breaks this figure down between U.S. and International MAUs.  U.S. MAUs saw no growth over the prior quarter and 3% growth against the same quarter last year while international MAUs saw 0.8% growth over the prior quarter and 5% growth over the same quarter last year.

On to profits. As mentioned, the company wouldn’t know what profits looked like since it’s never made any. We note Q4 operational and net losses climbed 213% and 85% respectively year over year. Keep in mind that this substantially larger operational and net loss was realized on just a marginal increase in revenues of 1%.

Concluding Remarks

The Twitter keyword search trend basically tells the story of a company that has reached maturity but unable to turn a profit. Management can spin the numbers whichever way they want but investors will only benefit when the company is profitable or expected to be profitable in the near future, which Twitter is far from. Its net losses are substantial and in the face of stagnant revenues shows signs that the business model is broken. To get out of the red, it would appear Twitter will need to increase user engagement and user growth both of which are becoming increasingly difficult. We maintain our negative sentiment on the stock. Even if another bidding war erupted, we expect that the valuations will not change in a significant way as any profit oriented individual would never pay a large premium for a company that bleeds money. Suffice to say, get out while you can as we expect that things can get worse.

[1] https://www.bloomberg.com/gadfly/articles/2017-02-10/wall-street-is-giving-up-on-revenue-challenged-twitter

 

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