Twitter (TWTR) posted its fourth-quarter earnings report on Feb. 10. The social media company's revenue grew 22% year over year to $1.57 billion, matching analysts' expectations. But its adjusted net income fell 9% to $284 million, or $0.33 per share, which missed estimates by $0.01 per share.

Twitter's stock price neither rallied nor dropped significantly after the report, but it has still shed about 45% of its value over the past six months. Should investors consider investing in Twitter as the market seemingly shuns it?

Two people check their smartphones together.

Image source: Getty Images.

Twitter is still gaining users

Twitter's monetizable daily active users (mDAUs) rose 13% year over year to 217 million in the fourth quarter. Its year-over-year mDAU growth has decelerated since 2020, but its sequential growth remains fairly steady:

mDAU Growth

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Quarter over quarter

3%

4%

4%

2%

3%

Year over year

27%

20%

11%

13%

13%

Data source: Twitter. mDAU = Monetizable daily active users.

Twitter's international mDAUs increased 15% year over year and 3% sequentially to 179 million, but its U.S. mDAUs only grew 3% year over year and stayed flat sequentially at 38 million. That ongoing imbalance is a bit worrisome since Twitter generated 56% of its revenue from its higher-value users in the U.S. in the fourth quarter.

On the bright side, its U.S. revenue still increased 21% year over year -- which nearly kept pace with its 23% growth in international revenue -- as it squeezed out more advertising revenue per daily active user.

Twitter also reiterated its long-term target of hitting 315 million mDAUs by the end of fiscal 2023, while generating at least $7.5 billion in annual revenue that same year, compared to its $5.1 billion in revenue in fiscal 2021.

It expects its revenue to increase by the "low to mid 20% range" in 2022 (excluding its recent sale of MoPub to AppLovin (APP 1.44%)), and its long-term forecast implies a similar revenue growth rate in 2023.

Its advertising business is shifting gears

Twitter's total ad revenue, which accounted for 90% of its top line, rose 22% year over year. Just like in the previous quarter, the company didn't experience a meaningful impact from Apple's (AAPL 0.01%) privacy changes on iOS, which recently caused Meta Platforms (META -0.79%) to post soft guidance for the first quarter of 2022.

Twitter's total ad engagements still dropped 12%, but it offset that decline with a 39% increase in cost per engagement (CPE). That shift isn't surprising, since Twitter previously said it would focus on more expensive "lower funnel" ads -- which directly target potential customers -- instead of cheaper "higher funnel" ads that broadly build a brand's exposure. It had expected that shift to reduce its total ad engagements while boosting its CPE.

We can easily observe the effects of that shift over the past year, but Twitter still needs to be mindful of pivoting too quickly toward lower-funnel ads:

Growth (YOY)

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Ad engagements

35%

11%

32%

6%

(12%)

CPE

(3%)

19%

42%

33%

39%

Ad revenue

31%

30%

87%

41%

22%

Data source: Twitter. YOY = Year over year.

Twitter's spending habits are worrisome

Twitter's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) declined 32% to $682 million in 2021 as it increased its total headcount by about 30%. It plans to boost its headcount by another 20% in 2022, with a heavy emphasis on its R&D efforts.

Analysts expect Twitter's adjusted EBITDA to more than double in 2022, driven by its sale of MoPub, but they also expect it to stay unprofitable on a generally accepted accounting principles (GAAP) basis. That red ink could make Twitter a risky stock to hold as interest rates rise.

Twitter believes its R&D investments will help it achieve its growth targets for 2023. However, many of Twitter's recent product launches -- including its short-lived "Fleets," "topics" for tweets, a new tipping feature, and "Twitter Blue" subscriptions -- arguably haven't justified that spending spree yet.

Parag Agrawal, who succeeded Jack Dorsey as Twitter's CEO last November, might still have more tricks up his sleeve, but the company's scattershot strategies simply haven't hit many targets yet.

Twitter also authorized a new $4 billion buyback plan to replace its existing $2 billion buyback plan from 2020. That deployment of its cash is frustrating, since it merely offsets the dilution from its stock-based compensation (12% of its revenue in 2021) instead of reducing its outstanding shares.

In fact, Twitter's number of weighted-average shares actually rose 1% in 2021 as it repurchased $931 million in shares. Meanwhile, its stock price declined 20% in 2021 and has dropped another 17% this year.

There aren't any compelling reasons to buy Twitter

Twitter is still gaining users and its shift toward higher-value ads is a smart move. But its spending habits are worrisome, its buybacks are wasteful, and its growth targets for 2023 still seem too ambitious. The stock also isn't a bargain at 29 times forward earnings and five times this year's sales.

Simply put, there aren't any compelling reasons to buy Twitter in this challenging market for tech stocks. For now, investors should focus on more promising growth plays instead of this lackluster social media company.