Why Shares of Twitter Inc. Slumped 14% in July

The social media company is struggling to explain the value of its service to users.

Timothy Green
Timothy Green
Aug 3, 2015 at 9:01PM
Technology and Telecom

What: Shares of Twitter (NYSE:TWTR) slumped 14.4% during the month of July, according to S&P Capital IQ data, driven by the company's second-quarter earnings report. While Twitter beat analyst estimates and issued solid revenue guidance, serious concerns regarding user growth and execution by the company put a damper on the stock.

So what: Twitter reported year-over-year revenue growth of 61% during the second quarter, above both its previous guidance and analyst estimates. Non-GAAP earnings of $0.07 per share were also better than analysts expected, and revenue guidance for the third quarter and the full year were in line and favorable to analyst estimates, respectively.

Despite these positive results, there are big problems beneath the surface. Twitter is growing its user base, with monthly active users rising by 15% year over year to 316 million. But that's about the same rate that Facebook is growing its user base, despite the fact that Twitter has just one-fifth the number of users.

CFO Anthony Noto summarized the company's problems during Twitter's earnings conference call: "In short, we have not communicated why people should use Twitter, nor made it easy for them to understand how to use Twitter. This is both a product issue and a marketing issue."

Now what: Beyond sluggish user growth, Twitter is also wildly unprofitable. During the second quarter, the company posted a net loss of $137 million on $502 million of revenue, not much of an improvement compared to the same period last year.

Twitter spent $202 million on sales and marketing during the second quarter, about 40% of revenue, and its admission that it hasn't done a good job of explaining the service to potential users is particularly troubling in light of this heavy spending. The concept of Twitter is simple, but the company hasn't provided a good reason for many users to bother with the service.

Twitter may have grown its revenue faster than analysts expected during the second quarter, but the company has deep flaws that won't be fixed easily. Investors punished the stock in July despite this revenue growth, and the stock price now better reflects the turmoil and uncertainty plaguing the company and its prospects.