The 2 Numbers Decimating Twitter's Shares

Twitter beats expectations, but which ones?

Feb 5, 2014 at 7:00PM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks closed marginally lower on Wednesday, as the benchmark S&P 500 index fell 0.2%, while the narrower Dow Jones Industrial Average (DJINDICES:^DJI) was down by just three-hundredths of a percent. Meanwhile, microblogging platform Twitter (NYSE:TWTR) reported its first set of quarterly results as a public company after the market's close to the market's great displeasure -- shares were down 18% at 6:32 p.m. ET.

Images

Source: Twitter.

The direction -- and intensity -- of the market's reaction to Twitter's results is surprising, at first glance. After all, most of the company's numbers look good, even great, relative to Wall Street's expectations, as the following table demonstrates:

Metric

Wall Street's Consensus Estimate Before the Earnings Release

Actual/Company guidance

Q4 revenue

$217.8 million

$242.7 million

Q4 earnings per share

($0.02)

$0.02

Q1 2014 revenue

$215.2 million

$230 million-$240 million

Q1 2014 EBITDA

$16.6 million

$10 million-$16 million

2014 full-year revenue

$1.13 billion

$1.15 billion-$1.20 billion

2014 full-year EBITDA

$143.5 million

$150 million-$180 million

Sources: Thomson Reuters I/B/E/S, Twitter.

The only "miss" is with regard to EBITDA in the current quarter (the third line), where Twitter's guidance range of $10 million to $16 million fails to meet analysts' consensus estimate of $16.6 million, but that shouldn't be all that upsetting, considering that the company's guidance for full-year EBITDA is well above the consensus estimate. (EBITDA, or earnings before interest, taxes, depreciation and amortization is a proxy measure for cashflow.)

As such, the after-hours stock price reaction suggests that the market's expectations were substantially above those of Wall Street analysts. Which brings me to the first number that is causing investors to decimate Twitter's shares this evening: 37. That was Twitter's enterprise value-to-EBITDA multiple as of yesterday's market close -- roughly three times Facebook's! The growth expectations implied in that multiple are phenomenal, and as I speculated this morning:

Given the 150%-plus run-up in Twitter's stock price from its IPO, I have a hard time seeing how this afternoon's results will satisfy market expectations (although perhaps this is a failure of imagination on my part). Investors ought to be prepared for a share price decline, one that could be significant.

Still, there has to be more to it than that -- a catalyst that planted a genuine doubt in investors' minds regarding whether Twitter can ultimately achieve the sort of growth that would justify its valuation. Which brings us to the second number that;s contributing to the decimation of Twitter's stock: 9 million. That's the total number of monthly active users the company added in the fourth quarter (with just 1 million in the U.S.), or 4% growth relative to the prior quarter. Twitter now has 241 million monthly active users, which is barely a fifth of Facebook's total. (Twitter doesn't do investors the courtesy of disclosing daily active users -- which is the key segment of the user base.)

The slowdown in user growth raises the specter that Twitter will remain a niche product instead of achieving widespread mainstream appeal. I think that concern is valid, as Twitter is less user-friendly and its utility less obvious than Facebook's.

Twitter's quarterly results provide investors with a new baseline with which to revisit the stock's valuation. This evening's correction looks more than warranted -- and there could be more to come; it's an object lesson in the perils of placing a high multiple on a business that shows promise, but which remains fundamentally immature.

Better than Twitter: The one stock you must own in 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends Facebook and Twitter and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers