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Why Twitter Stock Plunged After Q3 Earnings

By Trevor Jennewine – Nov 14, 2021 at 9:32AM

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This social media company failed to impress Wall Street.

In the United States, Twitter (TWTR) is the third most popular social media platform based on engagement time per day. However, the stock has underperformed the market over the last one, three, and 10 years, and that trend didn't reverse course when Twitter reported third-quarter earnings recently.

In this Backstage Pass video, which was recorded on Oct. 27, 2021, Motley Fool contributor Trevor Jennewine reviews the company's latest financial results, highlighting why its share price tumbled. Fool contributor Brian Withers is also in this clip.

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Trevor Jennewine: The company reported earnings yesterday after the market closed. This stock is down over 10% today. We'll get into that in just a second, but revenue came in at $1.3 billion -- that was roughly in line with management's forecasts -- up 37%. The big surprise was operating income was -$743 million, and that was a huge miss. Management was expecting roughly flat operating income, around $0 to slightly positive. A huge miss and, of course, that trickled down to the bottom line. On a GAAP basis, earnings per share was -$0.67. Again, huge miss.

The reason for that, there was a class action shareholder lawsuit filed back in 2016, and the company ended up paying $809.5 million to settle that lawsuit. There were some insurance benefits they kicked back the other direction. The net charge was $766 million. When you back that out, the company did have a positive operating income. Even if you do back it out, though, the operating income is still down from where it was in the previous year.

On the bright side, daily active users hit 211 million. That's up 13%, and that's a slight sequential acceleration. It jumped 11% in the previous quarter. And cash from operations was $389 million, up 81%.

This being an ad-supported business, Apple's changes to the iOS privacy terms were one of management's focuses here. They did say that it's too early to assess the long-term impact of the iOS changes, but they did think that the impact to quarter three was less than what they were expecting. Maybe a small silver lining there for shareholders, but definitely something worth paying attention to in the coming quarters.

One other thing that management mentions is that they're going to be selling MoPub, which has an ad exchange they bought back in 2013, I believe. That sale is going to be closing in the first quarter of fiscal 2022. They mentioned that might be a headwind to revenue, as the teams at MoPub shift to other areas of the business. The reason they're making the sale is, Twitter sees opportunities in performance advertising and, specifically, in commerce as well on the platform. They're pursuing what they consider to be higher value opportunities. They did mention that this sale will not impact their previous forecast, that they will reach $7.5 billion in annual revenue by 2023.

Turning to the outlook, they're expecting $1.5 billion to $1.6 billion in revenue for the fourth quarter, that will be up 24%. They're looking for operating income in the $130 million to $180 million range. That would be down 29% the prior year. Overall operating income coming in light this quarter. The weak guidance for the next quarter spooked Wall Street and the stock did sell off pretty significantly today.

Brian Withers: For me, Twitter's always been -- I think it has a great product and people love it -- but they've had a tough time monetizing the business and really being consistent. Depending on when you bought it, you could have made considerable amount of money if you owned it for the last five years, but if you owned it for the last 10 -- eh, not so great. Up 22% over the last 10 years, but the last five, it's up over 200%. It's been a tough stock for Fools to love.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.

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