Twitter: The One Fact That Is No Longer Hidden

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.

Ahead of tomorrow's Labor Department employment report for January, weekly initial jobless claims for the week ended Feb. 1 dropped by 20,000 to 331,000, below the 337,000 consensus estimate. That may partially explain why U.S. stocks opened higher on Thursday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.75% and 0.81%, respectively, at 10:15 a.m. EST. Meanwhile, shares of growth darling Twitter (NYSE: TWTR  ) are down by more than 18% this morning after the company reported its first set of quarterly results yesterday.

Source: Twitter.

Yesterday morning, I wrote that "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."

That very scenario is playing out this morning, despite the fact that Twitter pretty well beat Wall Street's expectations across the board, both in terms of actual results achieved during the fourth quarter and guidance for 2014.

This morning's sharp stock price decline highlights the gap that had opened up between analysts' expectations and those of investors. Indeed, following a huge post-IPO run-up, a stream of analysts had begun to downgrade the shares on concerns about valuation; going into yesterday afternoon's earnings announcement, analysts' median target price was $50, 24% below yesterday's closing price and in line with today's opening price. When analysts -- who are predisposed toward a cheery outlook -- turn bearish on a stock, it is past time for investors to revisit their bullish assumptions.

In this situation, the red flag concerned user numbers. Yesterday, Twitter announced that its number of monthly active users had grown just 4% during the fourth quarter, to 241 million, with just 1 million news users added in the U.S. Here are two points of reference to understand those numbers: First, Facebook achieved similar user growth in percentage terms in the fourth quarter despite starting from a base that was five times larger. Second, messaging app WhatsApp in December claimed 400 million monthly active users, having added 100 million users in the prior four months.

For the first time, it seems, investors are taking stock of the fact that Twitter is not a mainstream product -- and it may never be. As I have pointed out before, Twitter is less user-friendly than Facebook and its usefulness less is obvious -- these are barriers to widespread adoption. Twitter CEO Dick Costolo recognized this yesterday when he said "we want to do a better job of organizing content for our users around topic lines rather than just chronological lines. We believe that topic-based discovery on our platform will make Twitter easier to understand and use for everyone."

Twitter is hugely visible, in part because it is so popular with members of the media. However, that media "megaphone" cannot now mask the fact that it remains a niche product. Whether it can graduate to mainstream status will determine if it can grow into its valuation -- a task that has been made a bit easier with today's decline.

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