Shares of Twitter (TWTR -0.97%) hit new two-year highs earlier this month, and the social media giant would probably be surpassing those levels now if it wasn't for the subsequent sell-off. Twitter is on a roll, but now it's time to prove that it's worthy of trading at its highest levels since late 2015. The dot-com darling reports financial results ahead of Thursday's market open.
It's going to be a big day for Twitter. It will announce its fourth-quarter numbers at 7 a.m., hosting its conference call an hour later. The market's going to have a lot of information to digest before the opening bell, and the only sure thing is that the stock will be volatile. It could be a great day. Twitter stock soared 18.5% the day it posted its third-quarter results. It could also be a lousy day, so let's go over some of the things that can go wrong.
1. Revenue can keep going the wrong way
With Twitter shares reaching 26-month highs last week one would think that business would be booming, but that's just not the case. Revenue has fallen for three consecutive quarters, and analysts see the same scenario playing out on Thursday.
Twitter's audience has been growing, but it's been struggling through some monetization challenges. The market has accepted that 2017 is a gap year when it comes to revenue growth, but if the micro-blogging platform hints at the possibility of not resuming a path of top-line growth starting with the current quarter -- where analysts do see an increase in revenue -- it will be a long day for Twitter investors.
2. Growth in daily active users can decelerate
The biggest factor spurring the stock's revival is a return to brisk growth for its most active accounts. Daily active users clocked in at 330 million at the end of September, 14% ahead of where it was a year earlier. Twitter has now posted four straight quarters of double-digit gains in daily active users.
With revenue per user sliding and monthly active users growing slower than daily active users this has become a critical measuring stick. If the count of daily active users slows to single-digit growth -- or worse -- it could lead to a lot of cold feet.
3. A peculiar hot-and-cold trend can continue
Twitter's stock has responded with double-digit percentage moves the week it reports earnings every single quarter since the summer of 2016. We get it. Twitter's volatile. The thing here is that this chaos has been a see-saw.
Q4 2016: Down 12%
Q1 2017: Up 13%
Q2 2017: Down 17%
Q3 2017: Up 21%
It's a coincidence. The market isn't just taking turns growing hot and cold on the stock every time it steps up with fresh financials. However, as investors we've learned to pick up on odd strings like this until the phenomenon ends. The pattern suggests a double-digit percentage move lower this time around, though at the end of the day that's just not going to happen if Twitter can surprise investors with revenue growth, sustain healthy daily active user growth, and avoid putting out thorny guidance on continuing monetization challenges.