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Why Twitter Shares Fell Sharply Today

By Daniel Sparks - Oct 28, 2015 at 12:31PM

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The reasons behind Twitter stock's decline, and why the pullback may not be justified.

What: Twitter (TWTR 1.89%) stock fell as much as 12% today, but had recovered to a decline of about 3.7% as of 12:30 p.m. The sharp decline in the stock price follows the social network's worse-than-expected third-quarter results.

So what: The specific reason for the sell-off is twofold.

First, Twitter's sequential user growth of 3% -- or 0.9% when excluding "SMS fast followers" -- was slightly worse than expected. And considering Twitter's user growth problem is the primary reason for the stock's 44% decline since April, the market was undoubtedly watching this metric closely.

Second, the company's guidance for fourth-quarter revenue was worse than expected. Analysts expected guidance for revenue of about $740 million and Twitter instead guided for revenue of $695 to $710 million.

Now what: Despite the market's dramatic reaction to the quarter, there's really no concrete reason for investors to alter their thesis for the stock after the quarter's results.

While one of the key hopes investors have for Twitter's new CEO -- co-founder Jack Dorsey -- is to address the company's user growth problems, it's going to take more than a few months for his strategies to play out.

Twitter Moments is one of the first product moves made under new CEO Jack Dorsey, but it was only launched a few weeks ago. Management said during the call it's going to take more time for product changes to roll out and impact user growth. Image source: Twitter.

And Twitter's revenue guidance still put the company in the lower end of its full-year expected revenue range. Even more, management implied during the earnings call that the third month of the fourth quarter could potentially come in much higher than Twitter's guidance implies, but because of the difficulty in predicting the volatile quarter, management exercised conservatism.

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