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1 Bit of Bad News for Twitter

By Chris Neiger - Mar 1, 2014 at 3:00PM

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It's going to take some new and innovative features to grow Twitter's users and ad dollars.

It's only been a few months since Twitter's ( TWTR -1.36% ) IPO and already the tech world is questioning how the company will grow its U.S. user base. Research company eMarketer added some more fuel to the fire this week when it reported that Twitter's growth in the United States is significantly slowing.

Source: Twitter.

Increasing ads, decreasing growth
Just a couple of years ago Twitter had essentially no advertising revenue, but this year the company expects to bring in $1 billion from its advertising. The vast majority, about 75%, of the company's ad revenue comes from the US and yet only about 23% of Twitter's users are based in this country.

To expand its international operations, Twitter is increasing its advertising and marketing footprint in a number of countries, including the U.K., Canada, and Australia. But foreign companies don't spend as much money on Twitter advertising as U.S. companies do, leaving more work for the microblogger with less pay.

That wouldn't be so troubling if Twitter's growth was looking up in the U.S. The latest numbers from eMarketer show that Twitter experienced 19.4% U.S. user growth in 2013, and growth is projected to drop to 10% in 2015 and just 6.4% by 2018 .

A minor facelift
While it likely disagrees with some of eMarketer's metrics, Twitter isn't unaware of the slowing user growth, which may be one of the reasons why it's testing out a major website redesign for its profile pages. The company also revamped the way in which photos are displayed so users can see more pictures within their feed.

As a recent Businessweek article pointed out, Twitter is making photos and videos more front and center and wants to make it easier for new users to see how the service can be valuable to them.

But is it enough?

Foolish thoughts
I don't think Twitter's in any real trouble right now, and with the stock price up 24% since the IPO it's safe to assume most investors agree. But investors should still take any slowing growth from Twitter seriously. The company relies so heavily on U.S. advertising that if the eMarketing numbers prove true Twitter better have some new and innovative ways of bringing in additional revenue -- or at least figure out how to increase international advertising.

Right now, U.S. companies may see Twitter as a way to experiment with some of their ad dollars, but not necessarily a great long-term avenue for reaching customers. And that may be one of Twitter's underlying problems. Updating the site could help, but potential users -- and users who aren't regularly active -- need to see how the social media site adds value to their lives. I think Twitter can do this with new features, but the question is whether it can do so fast enough before companies here decide that this slowing U.S. growth is too risky for their money. Users in this country are driving Twitter's current ad revenue growth, but the company won't be able to rely on that money if it can't get new users to sign up, 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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