Don't Get Too Excited About Twitter's Pop

Twitter (TWTR) stock popped big following the company's most recent earnings report, as investors cheered the news that it finally crossed into GAAP profitability.

In this clip from Industry Focus, analyst Dylan Lewis and Motley Fool contributor Evan Niu explain how Twitter finally managed GAAP profitability, and why long-term investors shouldn't take this quarter's results as a sign it's safe to jump right into the stock. Also, they discuss some alarming trends with Twitter's user growth, advertising business, and market segments.

A full transcript follows the video.

This video was recorded on Feb. 23, 2018.

Dylan Lewis: Shares of Twitter, Evan, are at highs that haven't been seen in over two years. What did the company do, that the market was so happy?

Evan Niu: The big one is, Twitter posted its first GAAP-profitable quarter ever, which on the third-quarter earnings, for their outlook, they had predicted as much. Which, investors, back then a few months ago, in their last quarter, they were pretty excited about this when Twitter forecasted and said, basically, "At the high end of our guidance, we think we can actually be profitable." And not just on a non-GAAP adjusted basis after you back out all these costs, but on a GAAP basis. And they were able to deliver. So, I think that's a pretty big milestone. Twitter has been around for 15 some odd years, and this is now finally their first profitable quarter on a GAAP basis. That was the big storyline from their fourth-quarter earnings report.

Lewis: And it looks like the company also managed to return to revenue growth, as well.

Niu: Barely. That's the thing. This profitability was primarily delivered by cost-cutting and not revenue growth. Revenue was up 2%, but costs were down 28%. So, you put those numbers together and that's pretty much exactly how you actually squeeze out a profit finally. Within that top line, ad revenue was up 1%. Ad revenue is really kind of flat, whereas the data licensing business was up 10%. That's a small part of the business, but up 10% is nice, a nice little progress there.

Lewis: And the growth story is kind of similar when you look over at users. There's posted growth, but it isn't really all that encouraging.

Niu: Right. Monthly active users was 330 million, flat sequentially, just a minor shift in the mix between U.S. and international. One went up a million, the other went down a million. So, nothing too meaningful there. More or less, the user base is still about flat. It speaks to, monetization is OK, it's not huge gains there, but, again, it's really all about cost-cutting.

If you look specifically within the costs, costs of revenue, R&D, sales marketing, they're all down around 30%, plus or minus a few percentage points. So, the cuts were pretty broad-based and consistent across the board. It's not like one particular department was getting a disproportionate amount of cost cuts. But, yeah, I think that's a pretty big step there.

Lewis: Something that I think is worth noting in looking through their earnings release, you talked about what's going on in their advertising business and how growth wasn't all that great, both with their advertising business and in the composition of user growth, the American market was actually struggling and posted declines. Most of the growth that we're seeing, both in advertising and in users, is coming from international markets.

Niu: Right. And the U.S. market for Twitter is pretty mature. Their user numbers there have flatlined for years around this 68 million figure on the monthly active users side. So, not really a lot going on there.

Lewis: Which, you think about the value of different markets, and North American market is the most compelling one for advertisers. It's where you get the highest average revenue per user. So, any losses there on the user side are going to be the most valuable users that you can possibly lose.

Niu: Right. Pretty much all the other social media companies, if you look at their monetization by geography, absolutely. North America and the U.S. is always by far the most profitable and best monetized.