Please ensure Javascript is enabled for purposes of website accessibility

Don't Believe the Hype: Twitter Edition

By Motley Fool Staff - Feb 27, 2018 at 10:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The stock jumped on some flashy-seeming numbers this quarter, but a closer look at earnings tells a different story.

Shares of Twitter (TWTR -0.71%) soared after the company reported its first-ever quarter of GAAP profitability, but long-term investors shouldn't rush in just yet.

In this segment from Industry Focus, analyst Dylan Lewis and Motley Fool contributor Evan Niu dig into a few of Twitter's more concerning metrics -- the ever-elusive daily active user count and the continually plummeting cost of ad engagements -- and explain what these numbers mean for the social media company.

A full transcript follows the video.

This video was recorded on Feb. 23, 2018.

Dylan Lewis: Another metric that management touted was that it's the fifth consecutive quarter that the platform has posted double-digit year-over-year daily active user growth. Unfortunately, this is a song we've been singing quite a bit, Evan, that's all we got on the news of daily active users.

Evan Niu: Right. This quarter, it was up 12%, but hard to really have that number hit home if you don't know what it's coming off of.

Lewis: Yeah. This is something we talked about back in the mid-2017 with Twitter, and frankly it's probably one of my biggest grievances with management and the platform: They talk about how important daily active users are for the platform, and how it's a core metric for them, and one that management monitors as a sensitive engagement, and yet they won't tell investors what that number actually is. They only provide growth rates for it.

Niu: And even the FCC has had issues with this. The FCC has sent Twitter letters being like, "Hey, can you explain this? Because it seems like it's important." And they just go back to the same crappy excuses. "Oh, it's not that important." It's hard to justify how they can say it's important but not tell investors. But, what can you do?

Lewis: They actually got a question via Twitter during their conference call, Lindsay Barber asked, "Will there ever actually be figures for DAU?" And Twitter's response was basically this jumble of corporate speak, talking about how they only focus on the most important metrics that they want to provide, and they don't want to make any changes during fiscal years that they're providing commentary on because they want to be able to provide consistent comparisons for investors. Maybe that's to say they'll consider doing it in a fresh year. Personally, I doubt it.

Niu: Maybe. I mean, especially with COO Anthony Noto recently leaving the company. He was kind of the de facto CEO in a lot of ways, and I think he had a lot of influence over their disclosure. It's very possible that with him leaving, because he got poached from SoFi, that personal wedding start-up, last month, to be their CEO. With him leaving, it does kind of open them up to the possibility of various types of changes at the top levels of Twitter.

Lewis: Needless to say, you and I would be thrilled if they decided to start disclosing that. One other thing that we've focused on the past as a point of concern with Twitter is what's been going on with their cost of ad engagements. They were down 42% year over year this quarter. And that figure has posted double-digit year-over-year declines every quarter since Q3 2015. This is something that we've talked about plenty when looking at their earnings. You think of the calculus for an ad-based business, you basically have the number of ads that you show people and what you charge for those ads. If ads continue to decline in price, you can only make it up on volume for so long. That's why they've really struggled to post overall revenue growth.

Niu: Right. That's going to be a key issue going forward, particularly as it seems like monetization and engagement and all these things seem to be peaking. It seems like Twitter is hitting the ceiling with some of these fundamental metrics that all contribute to the ad business. So, it is going to be tricky.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Twitter, Inc. Stock Quote
Twitter, Inc.
$37.53 (-0.71%) $0.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.