Everything seemed in place for Twitter (TWTR) to soar on its first-quarter earnings report.

The company delighted investors at its February Investor Day conference, unveiling a suite of new products and potential revenue streams. Digital advertising in general has been booming, as strong reports from Alphabet and Facebook showed last week, and the first quarter included a number of major news events like the Capitol insurrection and President Biden's inauguration, which helped draw people to Twitter. Third-party data even indicated strong traffic among users and advertisers during the quarter.

Despite that momentum, Twitter stock came up short. The stock plunged 15.2% last Friday and continued to drift southward on Monday. Its first-quarter results were slightly ahead of expectations, but second-quarter guidance missed the mark.

For Q1, Twitter's revenue rose 28% to $1.04 billion, ahead of the consensus at $1.03 billion. On the bottom line, adjusted earnings per share rose from $0.11 to $0.16, beating expectations at $0.14.

However, Twitter's second-quarter guidance disappointed, calling for revenue of $980 million to $1.08 billion, or up 43% to 58%, as it laps a lull a year ago during the height of the pandemic. That was worse than analyst expectations at $1.06 billion, and that helped sink the turnaround narrative.

With the sell-off, Twitter is now down more than 30% from its peak in February. Is it a buy? Let's take a look at a few factors to consider.

Several people looking at smartphones

Image source: Getty Images.

A legacy of disappointments

Twitter has long been a frustrating stock for shareholders. The company has a number of competitive advantages and is a unique platform in social media, but it has been unable to build the kind of thriving business that peers like Facebook have.

Management struggles to define the purpose of the platform, its best use cases, or how to give users, especially new ones, the best experience. It has also found it challenging to deliver relevant ads, making it difficult for it to compete with larger platforms like Google, Facebook, and Amazon.

Though Twitter stock has generally been a strong performer in the last few years, shares are still down from their peak in 2014, shortly after their IPO.

Those are all fair criticisms of the stock and the company, but they ignore where Twitter is today. The company has made substantial improvements in reducing harassment on the platform, and its removal of Donald Trump has not provoked the backlash that many expected.

Despite the setback with the stock, Twitter is still innovating faster than it has in a long time, rolling out Twitter Spaces (an audio platform like Clubhouse), acquiring Revue to add a Substack-like subscription business, and introducing Super Follows to allow top creators to monetize their content, giving the company new ways to grow revenue and increase engagement. On Monday, Twitter also said it would give hosts the ability to sell tickets to events on Twitter Spaces.

It's also expanded Topics to help make the platform more relevant and easier to use as users can get information on the topics they're interested in. In advertising, it's seeing solid growth in brand advertising and mobile app promotion, and it added new ad products like Curated Categories, giving advertisers an opportunity to target content and conversations that are only on Twitter.

A case of short-termism

Stocks often make large moves on earnings reports, but those responses aren't necessarily reflective of the stock's long-term trajectory. That seems to be what is happening here with Twitter. The stock came into the earnings report up more than 20% year to date and with high expectations baked in after the February investor conference, so it's not surprising that Twitter would fall on the results, but those are short-term concerns.

Management noted some headwinds from Apple's ad-targeting restrictions, and said data licensing revenue growth would slow  as it had already signed its biggest customers to contract renewals.

Still, the broader recovery thesis remains intact after the report. Twitter is steadily growing its user base, targeting monetizable daily active user growth (mDAU) of 20% annually, and aims to double revenue by 2023. Twitter's valuation also looks reasonable compared to other tech stocks , trading at a price-to-sales ratio of less than 10 based on this year's expected results, and it is profitable on a generally accepted accounting principles (GAAP) basis.

While the stock should continue to be volatile, the post-earnings pullback looks like a good opportunity to scoop up some Twitter shares.