At first glance, Twitter's (TWTR +0.00%) recently announced Q3 earnings would seem to be enough to give its many benefactors all they need to continue their buying spree. Revenues were up considerably over a year ago, the closely watched monthly average users, or MAUs, increased, and Twitter introduced a host of new revenue-generating tools last quarter. So, what's not to like? Based on investor's reaction, and Twitter's subsequent plummeting stock price, quite a lot.
As is the case with most any upstart company in hyper-growth mode, significant advances in revenues and the total number of users or customers is to be expected, and therein lies Twitter's problem. Simply meeting expectations is unacceptable at this stage of Twitter's business cycle, and rightfully so, which is why shareholders are paying the price. The question for investors is whether Twitter's over 10% drop in share price since sharing Q3's news is an ominous sign of things to come, or a buying opportunity.
Where's the love?
Not surprisingly, Twitter's Q3 revenues obliterated 2013's results, more than doubling to $361 million. Its closely watched MAU growth, a longtime area of concern for Twitter friends and foes alike, increased a so-so 23% compared to last year, up to 284 million. Sequentially, Twitter added 13 million MAUs last quarter.
If not for a $170 million charge related to stock-based compensation -- something fans of Twitter, and its more established brethren Facebook (FB +6.67%), are used to -- Twitter would have positive posted earnings per share of $0.01. For comparison's sake, Twitter took a $158 million charge in Q2 of this year for the same "stock-based compensation expense," while Facebook counted $353 million against earnings for the same overhead.
Say it isn't so
Much like Facebook's recent earnings announcement, all seemed right with Twitter's world after sharing Q3's news. In fact, Twitter's revenue projections of $330 million to $340 million from Q2 weren't just met, they were beaten handily. But that was Twitter's internal guidance, not what analysts had hoped for. Several analysts chimed in after Twitter's earnings, with several downgrading its stock -- some significantly.
So, what were industry pundits hoping for from Twitter? One analyst summed up the feelings of many perfectly, pointing to Twitter's share price prior to its earnings announcement, which was trading at 30 times 2016's expected EBITDA (earnings before interest, taxes, depreciation, and amortization) at the time, so it needs to hit financials out of the park, across the board.
Another dagger for Twitter, just as it is for Facebook following its solid earnings report, was future guidance. Twitter is expecting $440 million to $450 million in revenues in Q4, disappointing analysts and fueling its sell-off. Facebook's guidance also caused a furor, but for a different reason. During Tuesday's earnings call, Facebook's CFO said expenses for the balance of this year and next would be about $1 billion more than the pundits expected.
Buy, sell, or hold?
Like it or not, analysts and shareholders alike are right to expect Twitter to blow the financial doors off each quarter; that's the stage of growth it's in right now. And unlike Facebook, Twitter hasn't gained the trust of The Street as yet, which is at least partially responsible for Facebook dropping about 5% after its "bad" news, while Twitter's dropped well over 10% in value.
Even at these levels, Twitter is only appropriate for momentum investors, not an ideal methodology any means, rather than long-term shareholders, who base their investment decisions on fundamentals. As it stands, Twitter still needs to prove there's substance behind the hype, and that means demonstrating its new ad tools, buy buttons, and assorted other new revenue-enhancing solutions -- particularly its promoted video service still in beta-mode -- can drive substantial growth.
Considering all of the above, if you own Twitter, you'd be wise to hold it until the momentum kicks in again, which it likely will. How else did it reach such ridiculous stock prices before the bottom fell out? But if you don't, keep it that way. Over the long haul, Twitter is worth keeping an eye on as it attempts to implement new growth initiatives, but until it rounds the corner -- as Facebook has -- and starts generating some earnings, with or without stock-based expenses, Twitter shareholders will have a wild ride ahead.
