The S&P 500 and the narrower Dow Jones Industrial Average (^DJI 0.06%) were down 0.10% and up 0.01%, respectively, at 10:23 a.m. EDT. Today, the market will be focused on the 2 p.m. EDT release of the Federal Open Market Committee latest policy statement. Professional pundits will be parsing changes in terminology from the previous statement, but there isn't much riding on this meeting for long-term investors. The consensus view calls for another $10 billion reduction in monthly securities purchases, consistent with the "taper rate" the Fed has established at each meeting since it began winding down quantitative easing (I'm with the consensus on this).
In company-specific news, Twitter (TWTR) shares are down 11% this morning after the microblogging service reported disappointing user numbers after yesterday's close.
Sure, Twitter managed to beat Wall Street's expectations on earnings per share and revenue; on an adjusted EPS basis, Twitter broke even where analysts were expecting a loss of $0.03 per share, according to the Thomson Financial Network. Yes, guidance for the current quarter's revenue of $270 million to $280 million is slightly ahead of analysts' consensus estimate of $272.9 million (although the midpoint of the guidance range for 2014 revenue of $1.225 billion is slightly below the consensus forecast of $1.24 billion). But when you're a "new economy" stock, with a "new economy" valuation, that simply isn't enough.
If investors are to continue supporting Twitter's "bridge-to-the-moon" valuation, the company must deliver numbers that will allow them to dream of near-limitless future growth. Unfortunately, Twitter simply isn't coming through with its part of that implicit bargain. In particular, the 6% growth in average monthly active users over the fourth quarter is not enough to stoke investors' imagination or appetite.
In that regard, this earnings report is similar to the previous release, which resulted in a near-quarter drubbing for Twitter's stock on Feb. 6. Back then, I wrote this:
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.
Unfortunately for Twitter, the latest report provides more evidence that it is failing to achieve mainstream adoption. Twitter recognizes this internally -- an article in yesterday's Wall Street Journal notes that the company has tasked Chief Operating Officer Ali Rowghani to address that very problem.
In an interview with the Financial Times, CEO Dick Costolo dismissed the latest stock-price reaction, saying that "there are some more secular trends. A number of companies have had some fairly exceptional earnings and their stock has dropped so I'm not sure what might be happening." He's right that it is representative of a secular trend -- the overvaluation of a certain number of high-profile technology companies -- but he's wrong to believe it doesn't also reflect a genuine predicament for Twitter. A bit of corporate introspection might be useful right now: Chasing a mainstream audience is the wrong strategy -- Twitter ought to focus on building an outstanding niche product instead.
