What: Shares of microblogging site Twitter (NYSE:TWTR) soared (pun shamelessly intended) 28% in February as the company reported stellar earnings, according to S&P Capital IQ data. The company's revenue growth and narrowing losses placated investors' concerns regarding slowing monthly active user growth.
So what: As the above chart shows, the vast majority of Twitter's stock spike in February occurred within the first week of trading. After an initial buildup in expectations, Twitter surprised investors with a strong fourth-quarter earnings report on Feb 5. Revenue of $479 million -- a 97% year-over-year gain that produced a total that was 5.6% above analyst expectation of $453.6 million -- led to enthusiastic buying, with shares popping 16% the next day.
However, the slowing active user growth that underpins Twitter's struggles remained unaddressed: MAU did grow 20% on a year-over-year basis, but the vast majority of that growth happened in earlier quarters. Sequentially, the company only grew MAUs by 1.4% -- from 284 million in Q3 to 288 million in Q4, which was short of the 292 million MAUs analysts expected. It should be noted, though, that the company blamed an Apple iOS bug for a loss of 4 million users -- not MAUs.
Now what: In the short run, this was great news for Twitter CEO Dick Costolo. After an amazing IPO and subsequent euphoria that pushed the share price above $70 per share, the stock is down 12% on a one-year basis, even including February's strong performance. Before the earnings report, Costolo was battling calls to step down. He was spared further pressure to exit by a strong quarter that took the focus off of slowing MAU growth.
But while growing revenue is great, eventually investors want profit, and Twitter remains unprofitable on a generally accepted accounting principles basis. Although the company reported an adjusted Q4 earnings per share gain of $0.12 per share, the company actually lost $0.20 per share due to stock-based compensation expenses that ate an astonishing 41% of revenue.
While this is an accounting expense, and not a cash flow issue, I'd personally like for Twitter to address share dilution and provide more guidance as to when this expense is expected to ameliorate. When Twitter can manage its stock-based compensation expense, however, long-term shareholders should be rewarded.
Jamal Carnette owns shares of Apple. The Motley Fool recommends Apple and Twitter. The Motley Fool owns shares of Apple 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.