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3 Big Problems for Twitter, Inc.

By Daniel Sparks – Mar 24, 2014 at 10:05AM

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Could three big challenges for Twitter make the stock a sell?

Though Twitter (TWTR) shares have cooled off considerably from their all-time high of $74.73, the stock still trades at levels nearly twice its IPO price of $26. At $51, there are some incredibly rosy assumptions priced into the stock. While Twitter's triple-digit growth helps justify the valuation, three big challenges are cause for concern.

Twitter headquarters. Image source: Twitter. Photo by Aaron Durand (@everydaydude).

Slowing user growth
Twitter's year-over-year monthly active user growth has deceleratedfor eight quarters in a row. In fact, on an annual basis, Twitter's 2013 year-over-year MAU growth rate was nearly halved, from 59% in 2012 to 30% in 2013.

The decelerating growth of MAUs in Twitter's most profitable market, the U.S., is even worse. In 2012, Twitter MAUs in the U.S. grew 50%. In 2013, that rate fell to 21%.

Retention is getting more difficult
"Twitter accounts created in more recent years are less active than the ones started by early adopters from 2006-2011," according to The Wall Street Journal's recent article based on data from a forthcoming report from Twopcharts, a website that monitors Twitter activity. "About 25% of the accounts created in 2008 are still tweeting today whereas only about 10.7% of the accounts created in 2012 are tweeting a little over a year later," said WSJ author Yoree Koh.

The trend suggests that retention is getting increasingly difficult for the company. Is Twitter's target market more of a niche than investors believe?

Engagement is unimpressive
One of Facebook's (META -1.54%) most undervalued assets is its enormous base of daily active users. Of Facebook's 1.23 billion monthly active users, 757 million use the service on a daily basis. The ratio of DAUs to MAUs comprises the closely watched engagement metric. Facebook boasts an impressive 61.5% engagement rate -- a rate that has been steadily increasing sequentially since the social network went public.

Twitter's DAU story, on the other hand, isn't quite as exciting. The company reported 100 million daily active users in its S-1 filing when it had 215 million users. That's an engagement rate of 46%. But Twitter didn't provide an updated figure for DAUs in its fourth-quarter 10-Q or its 2013 annual 10-K.

More data from Twopcharts, however, suggests Twitter's engagement rate is likely unimpressive. The Journal's Yoree Koh explains:

To date, about 1.5 billion Twitter accounts have been registered, according to the Amsterdam-based Twopcharts. Of these, 955 million still exist today, but only 13% have tweeted in the last 30 days. That is roughly half of the 241 million monthly active users Twitter said that it had as of the end of 2013. Twitter defines a monthly active user as an account that logs in at least once a month. It does not necessarily have to tweet anything.

Twitter's greatest strength
But to Twitter's credit, there is one area (a very important one) where the company is doing exceptionally well: monetization. Advertising revenue per thousand timeline views reached $1.49 in the fourth quarter of 2013, an increase of 76%, year over year. With this driver in tact, these three problems aren't enough reason for investors to sell the stock. Instead, investors should simply keep a close eye on these problems in the coming quarters to see how they develop.

Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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