Anyone who read the statement Twitter's (NYSE:TWTR) part-time CEO Jack Dorsey put out after its third-quarter earnings release might logically assume the company's rough days are all in the past.
As Dorsey wrote, "This quarter we made progress in three key areas of our business: we grew our audience and engagement, made progress on a return to revenue growth, and achieved record profitability." Sounds good, right? Investors certainly thought so, boosting Twitter's share price nearly 20% the following day.
But some clarification is necessary to put Dorsey's words, and Twitter's Q3 results, into context. The notion that last quarter was some sort of home run speaks volumes about the meager expectations of both the company and Twitter bulls.
About that profitability thing
Excluding one-time items, Twitter was indeed profitable last quarter to the tune of $0.10 a share. However, by generally accepted accounting principles (GAAP), Twitter reported another loss, this time of $0.03 a share. These results had seemingly every pundit shouting from the rooftops.
Yet the only way Dorsey got Twitter teetering on the edge of profitability was by shaving its operating expenses by 16% year over year to $582 million. Twitter's sales of $590 million last quarter were 4% lower, primarily due to an 8% drop in advertising sales to $503 million.
At this stage in Twitter's existence, that investors would choose to overlook a drop in revenue is baffling. It's always good to see an organization find ways to run more efficiently, but does that really warrant a 20% jump in share price when it's accompanied by a drop in revenue?
About that growing user base
Twitter adjusted its monthly average user (MAU) figures downward, albeit slightly, after accidentally including some third-party users. Twitter now says it has 330 million MAUs, up just 4% from last year. For some perspective, despite the huge disparity in size and scope Facebook (NASDAQ:FB) in its most recent report boasted 2.07 billion MAUs, a number that rose 16% year over year.
Given the sizes of their respective user bases, if the Twitter and Facebook MAU growth percentages were swapped, that would make some sense, but for the former, a 4% increase isn't acceptable. And to cite Twitter's measly MAU base as a strong point is an even more of a head-scratcher.
It gets worse.
Over the past two years, Twitter has added all of 23 million MAUs. During that same span Facebook has grown by 461 million users, and its WhatsApp and Instagram properties have each ballooned their respective MAUs by 400 million.
To its credit (sort of), Twitter's guidance of adjusted EBITDA between $220 million and $240 million for the current quarter was a bit higher than analysts had expected. Twitter added that if it's able to hit the high-end of its forecast, it may truly become profitable to end the 2017 fiscal year. If a $0.03 a share loss warrants a 20% spike in share price, I shudder to think what response a break-even quarter, let alone generating a small profit, would elicit.
It almost seems unfair to compare Twitter's results with those of Facebook, but advertising revenue is the bread-and-butter of both social media providers. Again, despite its massive size, Facebook's ad revenue soared a jaw-dropping 49% to $10.1 billion, even as Twitter's declined.
It's clear Twitter has a bevy of fans rooting for it to succeed; the response to last quarter's "win" is evidence of that. But until it's able to deliver sustainable, significant user and revenue growth, the company's stock is not a buy. And current Twitter shareholders are going to be in for a wild ride.