Why the Market Is Growing Tired of Twitter

Learn why Twitter is underperforming and how the company could continue growing its user base.

May 7, 2014 at 2:00PM

Shares of social network company Twitter (NYSE:TWTR) are down more than 40% since early February, suggesting investors are getting tired of this barely profitable tech stock. The company managed to beat the Street expectations in the most recent quarter when it reported quarter revenue of $250.5 million, slightly ahead of analyst estimates. But user metrics showed signals of growth deceleration, causing a sell-off.

Note that even after the release of disappointing user-growth figures, Twitter is still valued as a growth stock. The company reported a slight non-GAAP profit of $183,000, yet it is valued at $22 billion. Other social network names, such as Facebook (NASDAQ:FB) and LinkedIn, are also trading at high market valuations, but unlike Twitter, their services are targeted to a broader audience. Is Twitter in trouble?

Twitter

Source: Statista

Give me growth instead of money
To sustain a high market valuation, Twitter needs to surprise investors with either strong monetization numbers or high growth figures. Monetization is still at an early stage, as evidenced by the most recent quarter, where the company reported flat non-GAAP earnings.

Luckily, the Street is not expecting Twitter to start generating earnings in the near term, as analysts were actually looking for an EPS loss of $0.03 in the first quarter of 2014. In return, the Street expects Twitter to deliver high growth figures, as a way of compensating for the company's weak profitability.

The slowdown
Twitter's average monthly active users came in at 255 million in the most recent quarter, representing an increase of 25% year over year. The fastest-growing segment is the mobile user base, which reached 198 million, an increase of 31% year over year.

At first sight, these numbers look good. But the truth is that Twitter's growth is slowing down alarmingly quickly. Twitter's user base grew at a 44% rate in the second quarter of 2013. In the third and fourth quarter of the same fiscal year, the company's user base grew 39% and 30%, respectively. In this context, a 25% growth rate is quite worrying.

Lessons from Facebook
To stop the slowdown, Twitter could use some of the strategies employed by rival Facebook. First of all, these services target broader audiences, because they offer a wide range of features. For example, Facebook users can use the service for "tweeting" by publishing status and their current mood in their timelines. They can also use Facebook to store their photos, or text with friends.

Twitter, on the other hand, is basically just for tweeting, which means sharing short 140-character text messages. By adding more functions, the company could broaden its target audience, and hopefully stop the slowdown.

Surely, this is a risky strategy, as Twitter could lose some of its fans. But it is not impossible. Facebook has changed considerably since its 2004 Web-oriented version, and yet it continues growing. Twitter could use a creative user interface to allow its traditional users to tweet as always, and at the same time it could offer additional features. It could have a "traditional version" and an "extended version" in the same platform.

Standalone apps?
Another way of attracting new users is by creating a portfolio of stand-alone mobile apps. Facebook owns Instagram and WhatsApp, which have their own user interface. Twitter does not have Facebook's cash in order to buy emerging start-ups, but it could use its huge user base to promote new apps that provide complementary services, such as an app that filters only news-related tweets, or a photo messaging mobile app.

Final Foolish takeaway
The Street is concerned about Twitter's ability to continue growing in the long run. As a niche service, Twitter's target audience is quite limited, especially if compared against rivals Facebook or LinkedIn.

To stop its user growth slowdown, Twitter could try adding new social features to its platform, while keeping a simple user interface that allows its traditional fans to use the service just for tweeting. In this way, the company could minimize the risk of losing old users. The company could also try to develop a stand-alone portfolio of complementary apps, a strategy that has also been implemented by Facebook in the past.

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Victoria Zhang has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool 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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