Twitter Still Hasn't Answered These Critical Questions About Its Future

In the wake of its third-quarter report in late October, Twitter (TWTR) stock tumbled 21%. The culprit? Its year-over-year user growth slowed for the first time since the end of 2018. This left investors wondering what the future holds.

In this clip from Oct. 30's Fool Live, Fool.com contributors Danny Vena, Daniel Sparks, and Jason Hall discuss Twitter's predicament and the questions it will eventually have to answer for investors.

Jason Hall: Talk about a stock that's having a brutal day. Right now, Twitter stock is down.

Danny Vena: Twenty-one percent.

Jason Hall: Down more than 20% still. Yeah, it's not a good day. Let's see who do we have lead us off here? I think we're going to start out with, Danny, you want to talk about a little bit of what's going on with some of these metrics?

Danny Vena: Absolutely, one of the things that I would point out about the Twitter here is that, I think the fact that people have been really looking at Twitter's revenue growth. But even more than that, they've been interested in how is the company doing in its users because frankly, if you don't have the users, the advertisers are not going to follow. Now, Twitter ended the quarter with 187 million daily active users. It's only added about a million new users during this quarter, which is versus 20 million last quarter and six million year over year. That's a pretty tough break, a downturn as far as user growth goes.

Now, I'm going to share a screen here for just a minute so that I can show you what Twitter shared with us in its shareholder letter, and in its earnings highlight, you'll notice that it uses a little bit different metric. It uses monetizable daily active users. A couple of years back, Twitter said, "We don't like the daily active user number because it doesn't represent what we're focusing on, we're focusing on those users that we can make money out of." They switched to the monetizable daily active users, and if you look at this beginning in the fourth quarter of 2018, (points to chart showing the following metrics for each quarter, beginning in Q4, 2019) 9% year over year, 11%, 14%, 17%, 21%, 24%, 34% -- consistent accelerating growth -- and then this quarter, it went from 34% growth year over year last quarter to 29%. I think that's one of the things that investors are looking at, the decelerating monetizable active user growth. Because, again, if you don't have the eyeballs, the advertisers are not going to follow. I think that is probably one of the big reasons that Twitter stock is down about 21% today. But I think Daniel is probably going to talk about the revenue growth here.

Daniel Sparks: Yeah, but it's interesting about the users given the year-over-year growth is pretty impressive. But yeah, I think what investors are wondering is how much of this was a temporary catalyst because of the coronavirus, because of we all know that President Trump is really active on Twitter. So it just makes you wonder how much of that is and I wonder if there's investors thinking through that, but thanks for that, Danny.

As far as the revenue growth, so it came in at 14% year over year during the quarter, and which was an acceleration and beat estimates very easily. Fifteen percent growth in advertising specifically, so advertising is doing very well.

But what I think is interesting is the difference between Twitter's revenue growth and other social networks. You look at Facebook (NASDAQ: FB) growing about 20% year-over-year during the quarter. Then of course, you look at [Snap's (NYSE: SNAP) Snapchat which is a different demographic that they're mostly going after, but Snapchat revenue was up 52% year-over-year. Then of course, Pinterest (NYSE: PINS) and the 50s, somewhere around there as well.

It does make you wonder, is Twitter missing out on some advertising product innovation? There has been a lot of ad product innovation at these other tech companies, and you don't see much going on, you don't notice it as much at Twitter, I think they move more slowly and deliberately, which maybe it will pay off greater in the long-term. Perhaps other people are increasing the amount of ads on the platform and really increasing the the size and just the prominence of ads before people on which is more of a short-term plan, maybe Twitter will pay off over the long-term, but taking it slow.

But cash is cash and the more of these companies get now the more they could reinvest into better product, not just ad product, but overall software products and user experience. I do wonder if that could be a concern, that they're just not growing as fast here, so I'm going to continue to keep an eye on that.

Jason Hall: Yeah, I think it's something that needs to be continued watching, because I think the big question that analysts and a lot of investors have had about Twitter for forever is can it really find a way to leverage this very engaged user base to actually make money with advertising. It just never demonstrated consistently anything that seems to work the way investors want it to work. That continues to be like the weight around its neck.