Is Twitter better? Or just not as bad as Wall St. feared?
Twitter's stock surged as much as 36 percent to $52.35 a share Tuesday after reporting sales that grew 124 percent, an unexpected net profit and – perhaps most importantly – a 25-percent increase in monthly active users.
It is all welcome news for a company that has so far delivered much more on social and cultural impact than on financial performance. But it is also a reminder not to get too carried away by the short-term response of the stock price to a single piece of news.
Twitter's stock later settled down to the $50 level, still an impressive 30-percent jump over the closing price on market trading hours. But consider that it was only four months ago since Twitter's stock last traded above $50 – a period during which many insiders frst became able to sell shares. And that the stock is still down 32 percent from the all-time high it reached in December.
Consider also that, as some realists were quick to point out, this is not a stellar quarter by historical standards. In the previous quarter, revenue grew by 119 percent and monthly active users grew by 25 percent. What was bad news three months ago is now, to judge by the reaction of investors, an excellent result.
And consider that the two-cents a share non-GAAP net profit turns into a GAAP loss of 24 cents a share, thanks to $158 million in stock-based compensation, which generally accepted accounting principles demands companies record. Twitter is profitable, as long as you ignore the fact that much of its compensation is paid in stock, not salaries. That $158 million is equal to more than half of Twitter's revenue this quarter.
Wall Street analysts hew somewhat perversely to non-GAAP numbers. On that level Twitter has now beaten Wall Street analysts' estimates for all three of its quarters as a public company. In January, the company's stock fell 18 percent after beating estimates. In April, it fell 8 percent after doing the same. This time it's up 30 percent.
The story Wall Street has been telling about Twitter is that it's an alternative to Facebook. When Facebook was floundering in its first year as a public company, Twitter was seen as just the antidote to get the tech IPO market humming again. When Facebook revived its growth, Twitter became the anti-Facebook, the poor cousin who could never measure up.
So while Twitter beat the Street on revenue and profit, investors focused instead on monthly active users. In its prospectus, Twitter said its MAU's had been growing about 40 percent on an annual basis. MAU growth slowed to 30 percent in the December quarter, and further to 25 percent in the March quarter. Facebook, which has a vastly larger user base, has been growing around 15 percent a quarter.
So why is the 24-percent growth in Twitter's MAU last quarter – the slowest rate of expansion it's recorded publicly – such good news? Because analysts and investors had set the bar too low. They were expecting MAU growth to slow much more than it did.
To Twitter's credit, it implemented product changes designed to increase user engagement. And while the company insists that it was these changes, and not the World Cup, that pushed up the active user metric higher, the global soccer frenzy didn't hurt. It gave people who once signed up for Twitter and then ignored their accounts a reason to come back. And of its active users, it kept them in their timelines longer.
The broader story behind the surge in Twitter's post-earnings stock performance is actually an old one, and which Dick Costolo has been telling for a while. The company is making changes to increase user engagement and revenue, not by making the interface more spammy but by making it more inviting. Yes, there has been turmoil in the executive suite, but the rank and file has been focused on this goal for months.
So much like Facebook a year ago, Twitter is focused on it's long-term growth, but Wall Street has been focusing on short-term distractions. It was irrationally bullish after the Twitter IPO, then irrationally bearish for several months. Now the balance is shifting back to the bulls, aided by the short sellers who built up bearish positions in the stock earlier this year and who may have been covering those short positions today.
Twitter still has to prove it's not like Skype or instant messaging – technologies that were quick to disrupt older businesses and painfully slow to create new, profitable alternatives. This quarter shows it's starting to get there, slowly. So Twitter is getting better. On its own timeline. The volatility in its stock is just a sideshow, albeit an entertaining one.
[Illustration by Brad Jonas for Pando]