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The Only Thing That Can Turn Twitter, Inc's Fortunes Around

By Tim Brugger – Feb 9, 2016 at 8:40PM

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The tweet master is fighting its way through a rough patch, and there’s only one thing that will turn the tide.

Jack Dorsey's latest reign as CEO of Twitter (TWTR 1.31%) has been a rough one. When Dorsey took the Twitter CEO gig on an interim basis on July 1, the stock was trading around $35 a share. When the board removed interim from his CEO title on Oct. 5, the stock was around $28. And Twitter shareholders don't need to be reminded how far the stock has dropped since then.

Not that Dorsey, or any one person for that matter, is to blame for Twitter's woeful stock performance of late.

But it's beginning to look like Dorsey was appointed captain of a sinking ship. With Q4 and 2015 annual earnings scheduled for Feb. 10 after the close of trading, the following day is sure to be an interesting one for Twitter fans and shareholders. Don't be surprised if Twitter shares news that its revenue has once again jumped -- it grew a whopping 58% year over year last quarter -- along with an increase in earnings before interest, taxes, depreciation, and amortization (EBITDA).

The problem for Dorsey & Co. is that Twitter's financials will take a back seat to the one thing that really matters: user growth.

Image courtesy of Twitter.

You're kidding, right?
It's been a little more than a year now, but Twitter aficionados may recall co-founder Evan Williams' rant following news that social media king Facebook's (META 2.07%) Instagram property had not only surpassed the 300 million monthly active user (MAU) mark, but it had blown past Twitter in terms of usage. Williams made it abundantly clear that MAUs don't matter, certainly not to the extent that the Street suggests, and Twitter was doing just fine as it was.

The reason Williams' tirade is important is that it summed up Twitter's problem in a nutshell: MAU growth does matter, whether insiders are willing to admit it or not. And in that regard, Twitter has been shooting blanks. Last quarter, Twitter added 3 million MAUs compared to the year-ago period, pushing its total to 307 million.

To put that into perspective, Facebook again added 40 million MAUs in Q4, just as it did in 2015's third quarter. With nearly half the world's Internet-connected population already logging into Facebook at least once a month, boosting usage by another 40 million is an impressive feat. Twitter's 3 million new MAUs? Not so much.

What to watch for
Like it or not, marketers paying for digital ads are concerned with not only the number of MAUs sites like Twitter, Facebook, and Instagram have; they also want to ensure engagement levels are high. Fair or not, Twitter is stacked up against Facebook by most investors and industry pundits, and with more than 1 billion "friends" logging in daily, it's safe to say engagement isn't a problem for the world's leading social media site.

Former Twitter CEO Dick Costolo summed up Twitter's user-engagement problems succinctly during an earnings call about a year ago. Costolo boasted of the 500 million folks who visited Twitter each month without actually logging into the site. What Costolo didn't seem to appreciate was that all those non-MAU visitors were a tell-tale sign that Twitter was viewed by many as a neat little site for a quick visit, but not something in which to actually partake.

Twitter's new ad products, possible tweaks to its timeline, and top-line revenue growth will almost certainly be near the top of Dorsey's list of items to cover when Q4 earnings are shared on Feb. 10, and that's fine. CEOs are expected to spin a good tale during conference calls, regardless of whether it's warranted or not.

But don't be fooled. If Twitter is able to right the ship, it will be because it has finally figured out how to corral and engage new MAUs. Period. If Q4 is anything like last quarter's paltry 3 million improvement in MAU growth, Twitter's recent stock price free fall could seem like a hiccup compared to what's coming.

Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.

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