Over the past month, shares of Twitter (NYSE:TWTR) have lost 17% of their value. Obviously, that can't be fun for the microblogger's investors.
Let's look at what's driving the decline, and whether there is light at the end of the tunnel.
Twitter's roller-coaster month
The most prominent catalyst to the pullback was easily Twitter's latest earnings release on Oct. 27, as shares lost 10% the following day. Once again, investors' primary concern was slowing user growth. Monthly active users, or MAUs, ticked up by 13 million sequentially to 284 million. Revenue skyrocketed on the strength of mobile ads, but that could not reassure investor concerns about Twitter's ability to keep growing its user base.
However, comments from management during Twitter's analyst day this week did encourage investors, who sent shares skyrocketing by 7%. The company provided some color on its total audience, which includes 500 million visitors who come to the site each month without logging in. Twitter intends to cater to this audience with a handful of new features, including "Instant Timeline."
CFO Anthony Noto also suggested that Twitter might move away from reporting Timeline views as its primary proxy for engagement, since some upcoming product changes could be "in direct conflict with growing Timeline views." That would be similar to Facebook, which reported likes and comments as a proxy for engagement when it first went public, only to quickly abandon those metrics.
Another negative storyline was credit rating agency S&P's official declaration of Twitter's debt as junk, assigning a "BB-" rating that is three levels below investment-grade. The company raised $1.8 billion in convertible notes in September, with the bonds having an effective conversion price of $77.64. Half of the notes are due in 2019, with the remainder maturing in 2021. Twitter is expected to use the capital for invest in future growth, but S&P doesn't have much faith in the company's ability to generate positive free cash flow until at least 2016. Shares fell 6% on the news.
It's certainly been a wild few weeks for Twitter.
Where does Twitter go from here?
The skepticism over Twitter's user growth prospects is justified. In this department, the company is hitting a ceiling in its most important market: the U.S. Twitter's ability to monetize is five times as strong in the U.S. as in international markets.
While Twitter has plans to bolster international monetization and reinvigorate user growth, only time will tell if the company can successfully execute. Meanwhile, its shares remain more expensive than Facebook's in terms of the price-to-sales multiple, and Facebook is relatively more mature.
Twitter might have more potential upside if it can follow through with its plans, but it's also a riskier proposition than Facebook.
Evan Niu, CFA owns shares of Facebook. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook and Twitter. Try any of our Foolish newsletter services free for 30 days. 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.