2 Warning Signs That Twitter Could Fall on Earnings This Week

Why Twitter could fall short of expectations after its upcoming earnings release this week.

Apr 28, 2014 at 3:00PM

Twitter (NYSE:TWTR) is set to report its fiscal 2014 first-quarter earnings after the market closes on Tuesday. And investors are hoping for a strong quarter to turn around recent price declines in the stock. To be sure, shares of the social media stock have fallen nearly 30% since Twitter's fourth-quarter earnings release in February. This will be Twitter's second earnings announcement as a publicly traded company. However, it might not be as positive as many investors hope, particularly as the social media giant continues to struggle with slowing user growth and increased market volatility.

Stagnant user growth
One indication that Twitter could underperform expectations for its first quarter is the recent decline in its user growth. Unlike rival Facebook (NASDAQ:FB), it seems Twitter is having trouble appealing to the masses. Twitter added just 9 million monthly active users worldwide in its last quarter for a total 241 million. It is worrisome to see growth in Twitter's monthly active users stalling so soon, particularly as Facebook now has global monthly active users to the tune of 1.28 billion.

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The number of inactive Twitter accounts is also on the rise. While the company defines monthly active users as users that login at least once a month, more than half of these so-called MAUs never send a single tweet or message. When it reports tomorrow, analysts will want to see proof that Twitter's user base is more engaged than it has been in previous quarters.

Unfortunately, how people use the service isn't something that changes over night and Twitter may need to tweak its platform a bit before we see a meaningful turnaround in how users interact on the social site. Moreover, research company eMarketer expects Twitter's growth woes to continue. By next year, its growth is estimated to fall from 19.4% in 2013 to just 10% in 2015, according to eMarketer.

A moody market for Internet and tech stocks
Despite the recent pullback in shares of Twitter, the stock still trades at a lofty premium at its current price of nearly $40.00 per share. The price-to-sales ratio gives us the best insight into the company's valuation today and with a P/S of 35.24, it is one of the highest in the Internet and services industry. For comparison, Facebook currently boasts a P/S ratio of 16.47.

On top of this, it has been a tough month for technology stocks. Facebook, Microsoft, and Amazon.com all reported better-than-expected earnings last week, yet the market punished them by pushing their respective stocks lower regardless of the results. As Wedbush analyst Shyam Patil points out, "High growth, high beta stocks are not being rewarded for good results right now."

This market trend seems to have spilled over into this week, with shares of Twitter and its Internet peers all trading down today. Therefore, shares of Twitter could continue to fall even if the company is somehow able to surprise investors with a reversal of user growth and engagement when it reports tomorrow. Analysts are looking for Twitter to post a loss of $0.03 per share, on revenue of $241.5 million in the quarter. Investors may want to steer clear of this name for now because of these near-term headwinds.

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Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends Twitter. It recommends and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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