Don't Sweat Twitter, Inc.'s Sell-Off

Headed into Twitter's (NYSE: TWTR  ) first-quarter earnings, the Street had big expectations. Unfortunately, the company failed to deliver the results needed to please the Street. Shares fell more than 10% in after hours trading when the results were released. While Twitter did post some impressive numbers, slower than expected growth took center stage... again. But a closer look at the overall results from Twitter shows that the Street may have overreacted.

Photo by Martin Ringlein (@smarty). Image source: Twitter,

The results
Top- and bottom-line results both came in above the consensus analyst estimate. Analysts expected Twitter to report revenue of about $241.5 million and a loss of $0.03 per share. Instead, Twitter posted revenue of $250 million and non-GAAP EPS just over zero cents.

That's some big growth from the year-ago quarter. In Q1 2013, Twitter reported a loss of $0.08 per share on revenue of $114 million.

But beating the consensus analyst estimate on revenue and EPS wasn't enough to soothe investor concern for the social network's 6% sequential user growth. Though that rate is an acceleration from last quarter, the growth sits notably below the rates achieved in other recent quarters.

Data used in this chart is retrieved from SEC filings for quarters shown and Twitter's S-1 filing.

Overreaction?
But is the Street's concern merited? Twitter is firing on all cylinders on every other important metric. Its ad revenue per 1,000 timeline views soared 96%, marking the fourth quarterly acceleration for the metric. Further, the rate was well above Q4's 76% year-over-year growth. Engagement also came in nicely, showing the first sequential gain (albeit only by 1 timeline view) since the second quarter of 2013. And is the quarter's user growth really that bad? Looking at user growth with the glass half full, this is the first uptick in sequential growth rates in six quarters.

Photo by Marisa Allegra Williams (@marisa). Image source: Twitter,

In a nod to Mr. Market's moodiness, the stock admittedly sports a pricey valuation -- a factor that gives investors a right to have big expectations for the company. With a market capitalization of about $22 billion and trailing-12-month revenue of just $800 million, Twitter's price-to-sales ratio of 27.5 even outdoes the Facebook's bullish price-to-sales metric.

Still, the overall results were excellent. Twitter beat my expectations on every front. And the meaningful uptick in Twitter's sequential user growth is good news for investors. While the user growth may be smaller than some investors had hoped, it's to early to judge the company's efforts to reinvigorate user growth to more meaningful levels.

What should investors do? Shareholders should hold on to the stock. There's no reason to have less confidence in the stock after the report. Investors who had Twitter on their radar may want to dig deeper to see if the stock is worth taking a small position in at a lower price.

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Read/Post Comments (7) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 30, 2014, at 3:45 AM, secularinvestor wrote:

    Twitter’s user growth of 4% to 7% a quarter pales into insignificance when compared to Instagram.

    When Facebook bought Instagram in April 2012, they had just 30m users. Last month they announced they had passed 200m i.e. growth of 660% in just 2 years.

    So in the next few months Instagram, Twitter’s closest competitor, will almost certainly overtake and accelerate past Twitter’s 245m users.

    All the data shows that Instagram achieves amazing levels of usage and engagement, especially amongst the young who are supposed to be leaving Facebook.

    Also Facebook is only just starting to monetise Instagram, which will greatly add to Facebook’s revenues and earnings in coming years.

  • Report this Comment On April 30, 2014, at 4:11 AM, secularinvestor wrote:

    What has happened to my comment?

  • Report this Comment On April 30, 2014, at 6:30 AM, sungura2005 wrote:

    Twitter's P/S ratio is too high. We love using Twitter but we're notorious for ignoring the ads.

  • Report this Comment On April 30, 2014, at 6:48 AM, pcur wrote:

    A 6% rise of users and you're happy ?

    Just see the high flying metrics of Twitter and you understand that's the street expectation is largely above a 6% growth

  • Report this Comment On April 30, 2014, at 1:27 PM, TraderFool wrote:

    "What should investors do?"

    My personal view is that investors should reevaluate their holdings to see if this is money that they can afford to lose substantially. The trouble with TWTR is that it is so volatile and highly overvalued by conventional matrices, so small changes in assumptions can cause massive changes in value. In my book, it doesn't make it an "investment", but a "highly speculative" venture, more like "gambling". And because it is gambling, "investors" should not bet more than what they can afford to lose, because I have no visibility of the potential downside.

    I've blogged about my views in detail, if you are interested, you may view them here - http://traderfool.blogspot.com/2014/04/twtr-case-study-is-bu...

    Best wishes,

    TraderFool

  • Report this Comment On April 30, 2014, at 3:14 PM, osho2025 wrote:

    I'm actually shocked that Fool analysts champion Twitter or even Facebook for that matter. They are time untested speculative stocks. Since the fool caters to primarily newbie investors, they should be giving all warnings that buying these social media stocks is equivalent to putting $1500 on Red of a Roulette wheel.

  • Report this Comment On April 30, 2014, at 4:01 PM, TMFDanielSparks wrote:

    @osho2025,

    I certainly think there is risk. That is why I wouldn't say "Buy Twitter." Instead in this article I only said: " Investors who had Twitter on their radar may want to dig deeper to see if the stock is worth taking a small position in at a lower price." But I understand other analysts have given Twitter a buy recommendation, as you've pointed out. But investors can limit potential downside from riskier stocks by only starting small positions in the ones they wish to own.

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