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Twitter Becomes an Also-Ran in the Social Media Race

By Leo Sun - Updated Oct 28, 2019 at 2:17PM

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The underdog social network is running out of steam as it struggles with software bugs, tepid advertiser interest, and rising costs.

Twitter's (TWTR -0.92%) stock recently plunged to a seven-month low after the social media company's third-quarter numbers missed analysts' expectations. Its revenue rose 9% annually to $823.7 million, but it missed estimates by $51.2 million and marked its slowest growth in seven quarters.

Its non-GAAP net income declined 16% to $136.8 million, or $0.17 per share, which also missed expectations by $0.03. On a GAAP basis, which was skewed by a deferred-tax asset valuation allowance of $683 million a year earlier, its net income plummeted 95% to $36.5 million, or $0.05 per share.

A businessman watches a stock chart drop off a cliff.

Image source: Getty Images.

Twitter doesn't expect the situation to improve any time soon. It expects its revenue to rise just 3%-11% annually during the fourth quarter, compared to expectations for 17% growth. It expects its operating income to drop 18%-37% annually, and it didn't offer any guidance for its net income or EPS growth.

Twitter's numbers indicate that although the social network is still a popular soapbox for brands, celebrities, and politicians, it's failing to impress its mainstream users and advertisers. Let's dig deeper into Twitter's report to see why its platform is quickly becoming an also-ran in the crowded social media space.

Twitter's daily audience is surprisingly small

Earlier this year, Twitter stopped reporting its total number of monthly active users (MAUs). Instead, it replaced the metric with "monetizable" daily active users (mDAUs).

Twitter claims that proprietary metric isn't "based on any standardized industry methodology," so it's only roughly comparable to other platforms' DAUs. That metric also doesn't completely eliminate spam and bot accounts, but Twitter claims that those accounts comprised "fewer than 5%" of its mDAUs during the third quarter.

Twitter's mDAUs rose 17% annually and 4% sequentially to 145 million during the quarter. Within that total, its U.S. mDAUs rose 15% annually and 3% sequentially to 30 million. Its international mDAUs grew 17% annually and 5% sequentially to 115 million.

A small audience that isn't appealing to advertisers

Those growth rates look decent, but they indicate that Twitter is a weakling in the social media market, despite all the attention from President Trump's tweets.

By comparison, Facebook (META -2.57%) ended its second quarter with 2.1 billion DAUs across Facebook, Messenger, Instagram, and WhatsApp. Snap's (SNAP -4.12%) Snapchat grew its DAUs 13% annually and 3% sequentially to 210 million last quarter.

Piper Jaffray's latest "Taking Stock with Teens" survey also found that Twitter was significantly less popular than Instagram and Snapchat among U.S. teens. Just 40% of the poll's 9,500 respondents engaged with posts on Twitter, versus 85% on Instagram and 81% on Snapchat. Only 22% of all U.S. adults use Twitter, according to a 2019 Pew Research survey, compared to 24% on Snapchat and 69% on Facebook.

Social media icons hover about a laptop user's keyboard.

Image source: Getty Images.

That's probably why Twitter's advertising revenue, which rose 8% annually to $702 million during the quarter, is growing at a slower rate than its mDAUs.

Meanwhile, Snap's total revenue (which mainly comes from ads) surged 50% annually last quarter and comfortably outpaced its DAU growth. This indicates that Snap -- which is locking in users with new lenses, games, and original videos -- monetizes its existing users more efficiently than Twitter.

During the conference call, Twitter CEO Jack Dorsey attributed its sluggish advertising revenue growth to product issues (including bugs in its targeted ads and analytics) and "greater than expected seasonality in July and August." However, Dorsey notes that it "saw strong September results and good advertising momentum" -- although its soft guidance indicates that momentum won't last throughout the fourth quarter.

Twitter's data licensing unit, which sells feeds of real-time data to companies for analytics purposes, grew its revenue 12% annually to $121 million, but that growth couldn't offset the slowdown of its ad business. On the bright side, Twitter's total ad engagements rose 23% and outpaced its mDAU growth.

Wobbly margins and an uncertain future

Twitter's total costs and expenses rose 17% annually to $780 million during the quarter, which caused its operating margin to contract from 12% to 5%. Its guidance for the fourth quarter implies that its operating margin should come in between 14%-17%, which would mark an improvement from the third quarter but mark a decline from 23% in the fourth quarter of 2018.

Twitter's declining margins, along with its decelerating revenue growth, lackluster mDAU growth, and execution issues, clearly indicate that its high-growth days are over. The stock also can't be considered a value play at nearly 30 times forward earnings.

In short, there aren't any compelling reasons to buy Twitter after its post-earnings drop. Investors should stick with Facebook for a more stable play on the social media market, or buy Snap for more speculative growth.

 

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Facebook and Snap Inc. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Twitter, Inc. Stock Quote
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