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What Are the Takeaways From Twitter's Last Quarter?

By Motley Fool Staff – May 7, 2018 at 1:18PM

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Remember when the smart money thought the company's only good path forward would require it to be acquired? Yeah, that storyline has changed a lot.

In this segment of the Motley Fool Money podcast, host Chris Hill and senior Fool analysts Jason Moser, David Kretzmann, and Jeff Fischer consider the current status of social media major Twitter (TWTR 2.57%), which put a second consecutive quarter of profits in the books.

Shares did slide, but considering that they're up around 75% over the past 12 months, it's hard to get anxious about a bit of profit-taking. The Fools look at where the company is succeeding, how it views its place in the world, and more.

A full transcript follows the video.

This video was recorded on April 27, 2018.

Chris Hill: For the second quarter in a row, Twitter posted a profit. Twitter also showing some pretty nice growth internationally, Jason. Shares down a little bit this week, but maybe that's a valuation thing, because it's up about 75% over the past year.

Jason Moser: Yeah. I think that goes back to that voting vs. weighing thing. In the short term, people are just voting. There's profit-taking and whatnot. It's obviously been a very good stretch here for Twitter. I think, if you're a Twitter investor, you need to feel great about this quarter that the company just turned in for the first quarter of 2018. All metrics, really, it was an unmitigated success.

For me, looking at not only revenue growth but why it's growing, engagement is there, they saw another quarter of double-digit daily active user growth, which is a sign that the platform is indeed remaining engaging, and I think it's proven its place in this world, so to speak. It's not Facebook, and I think that was the point of Jack Dorsey's quote when he said, "We're not a social network and we do not benefit from the same social graph that social networks do. People come to us because they're interested in something, and they're interested in seeing what's happening within the world or within a particular topic or within a particular niche interest." And that's important, because that's the mentality that's going to guide decision-making and investments for this company going forward. Which is good, I think.

And one final metric I'll note, because this was held against them for a very long time, so let's give them credit where credit's due -- stock-based compensation as a percentage of revenue has come down tremendously. This quarter, they reported it was 11% of revenue. A year ago, it was 21%. So, that is just a sign that management is living up to the promise that they made, and that really does matter.

Hill: And just from a 50,000-foot view, you look at Twitter, and the conversation has changed about Twitter -- for the better, I would argue. There was a good six-month stretch a couple of years ago where the dominant question about Twitter was, "Who's going to buy them?" Because everyone, or, most investors, agreed, "They don't really look like a company that's going to make it on its own. Someone's going to buy them. Who's going to be the best fit?" And that's no longer the case at all.

Jeff Fischer: And the shares now trade at 35X free cash flow, which is not that expensive, so any acquirer would have to pay quite a premium to the current share price. And, it's a $24 billion company now, so not cheap, either.

Moser: And it's a profitable company. So, I mean, we're going to have some new fundamentals to measure it by. And last thing here, a few years back, there was the whole Twitter is Dead thing. Now, we have this #DeleteFacebook thing. People, get real, you're not going to do it. Changing human behavior is just far more difficult than some hashtag. I think, #DeleteFacebook, I hold that right about there with the Twitter is Dead thing. It's going to pass here in no time.

David Kretzmann: Just leave it to Kanye West to boost engagement a bit.

Moser: [laughs] Yeah.

Hill: See, Jason, I thought you were going to suggest that, if Microsoft wants to get serious about mobile, they should buy Twitter.

Moser: Well, no, because then I fear they might ruin it. I'd rather Twitter just be on their own! I don't want anyone to buy them, they're doing some good stuff.

Fischer: Drop in the bucket for them. LinkedIn, then Twitter?

Moser: No!

Kretzmann: Sure.

Fischer: And, there is a lot of room to keep improving Twitter, too, the experience. So, that's on the positive side.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Hill has no position in any of the stocks mentioned. David Kretzmann owns shares of Facebook and Twitter. Jason Moser owns shares of Twitter. Jeff Fischer owns shares of Facebook and Twitter. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.

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