2 Crucial Questions That Twitter Must Answer on July 29

Before you pay a high premium to invest in Twitter, the company needs to answer these two questions, and prove that neither are an issue on July 29.

Jul 20, 2014 at 11:00AM

Twitter's (NYSE:TWTR) earnings will be among the most highly anticipated of the season on July 29 after seven different firms have upgraded the stock following its lockup expiration. While analysts have remained bullish, Twitter's eventual upside lies in its ability to improve engagement and drive user growth, like Facebook (NASDAQ:FB). However, will it be successful?

A lot of questions ahead of earnings
Ultimately, for social media companies to experience long-term success they must have strong user growth and engagement in order to attract video and display advertisers in a competitive market. These two areas have been concerns for Twitter investors in recent quarters. Specifically, Twitter had guided for 400 million monthly active users to end 2013, but fell well short, currently having just 255 million to end the first quarter of 2014.

With that said, Evercore reiterated its Overweight rating last month after saying that Twitter's user base may be 20% higher year-over-year in the second quarter. However, data on Twitter's user growth has been volatile, giving investors a lack of clarity as to what should be expected.

Specifically, two independent sources recently told Business Insider that Twitter's user growth remains challenged. Reportedly, if not for the World Cup, Twitter's monthly active users would have actually fallen into negative territory quarter-over-quarter, and that Twitter will finish the quarter in the very low 260 million range.

If accurate, this would prove that recent initiatives to improve the user experience and boost engagement is not working. Not to mention, it would represent a decline from Twitter's quarter-over-quarter user growth during the fourth and first quarter of 4% and 6%, respectively.

A deep connection with user engagement and growth
Given Twitter's $21 billion market capitalization and the high expectations that naturally come with a stock that trades at 27 times sales, controversy is always high surrounding the company. However, some of the more reliable data points we've seen to explain Twitter's user growth woes are most certainly in connection to its poor user engagement statistics.

For example, Deutsche Bank conducted a survey earlier this year on ex-Twitter users. What Deutsche found was that nearly 60% of ex-users had less than 10 followers, implying little engagement, and that 66% sought more sharing of posts like videos.

Twitter Users Who Left Say

Source: Deutsche Bank analysis on Twitter ex-users

In adding to this analysis, Hillside Partners found that Twitter sharing had fallen 5% year-over-year during the first quarter. Meanwhile, Facebook's likes and shares grew 31% and 14%, respectively.

User engagement's role with revenue growth
Notably, there are much fewer questions surrounding Facebook's fundamental outlook these days, as advertising revenue has soared across both mobile and PC platforms. Facebook has implemented new products to become more friendly to advertisers, and its improving user engagement has aided in this effort as a way for promoted posts to become more beneficial for the advertiser.

Furthermore, Facebook's advertising software provider Nanigan recently reported that its clients experienced a 146% increase in click rates on the Facebook platform during the second quarter. Meanwhile, Nanigans claims that its clients' cost per 1,000 impressions have soared 218% year-over-year, and 57% quarter-over-quarter.

In other words, this is a direct tie that improved click and engagement rates is having an effect on Facebook's ability to monetize advertisers at a higher rate; implying there is more value in Facebook's platform. Hence, when users are engaged with advertisements, this data proves that advertisers are willing to pay higher prices.

Foolish thoughts
As you can see with Facebook's data, engagement is crucial for Twitter during the second quarter following its new initiatives to improve the user experience. However, growing users is equally important in boosting engagement. These two metrics will be important for Twitter investors to monitor in the second quarter following back-to-back lackluster quarters in user growth.

Ultimately, Twitter's valuation is tied to its long-term performance, and expectations that it will grow larger. However, Twitter must answer questions regarding user growth and engagement with data being so fickle. Until it proves that neither are a fundamental problem, it would be hard to get long Twitter when trading at 27 times sales.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Brian Nichols 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers