The 2 Numbers Decimating Twitter Inc’s Shares

Twitter Inc (NYSE:TWTR) reveals a slowdown in user growth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A version of this article originally appeared on

WASHINGTON, DC — Microblogging platform Twitter (NYSE: TWTR.US) reported its first set of quarterly results as a public company after the market’s close to the market’s great displeasure — shares were down 18% at 6:32 p.m. ET.

Source: Twitter.

The direction — and intensity — of the market’s reaction to Twitter’s results is surprising, at first glance. After all, most of the company’s numbers look good, even great, relative to Wall Street’s expectations, as the following table demonstrates:


Wall Street’s Consensus Estimate Before the Earnings Release

Actual/Company guidance

Q4 revenue

$217.8 million

$242.7 million

Q4 earnings per share



Q1 2014 revenue

$215.2 million

$230 million-$240 million

Q1 2014 EBITDA

$16.6 million

$10 million-$16 million

2014 full-year revenue

$1.13 billion

$1.15 billion-$1.20 billion

2014 full-year EBITDA

$143.5 million

$150 million-$180 million

Sources: Thomson Reuters I/B/E/S, Twitter.

The only “miss” is with regard to EBITDA in the current quarter (the third line), where Twitter’s guidance range of $10 million to $16 million fails to meet analysts’ consensus estimate of $16.6 million, but that shouldn’t be all that upsetting, considering that the company’s guidance for full-year EBITDA is well above the consensus estimate. (EBITDA, or earnings before interest, taxes, depreciation and amortization is a proxy measure for cashflow.)

As such, the after-hours stock price reaction suggests that the market’s expectations were substantially above those of Wall Street analysts. Which brings me to the first number that is causing investors to decimate Twitter’s shares: 37. That was Twitter’s enterprise value-to-EBITDA multiple as of yesterday’s market close — roughly three times Facebook‘s! The growth expectations implied in that multiple are phenomenal, and as I speculated yesterday:

“Given the 150%-plus run-up in Twitter’s stock price from its IPO, I have a hard time seeing how this afternoon’s results will satisfy market expectations (although perhaps this is a failure of imagination on my part). Investors ought to be prepared for a share price decline, one that could be significant.”

Still, there has to be more to it than that — a catalyst that planted a genuine doubt in investors’ minds regarding whether Twitter can ultimately achieve the sort of growth that would justify its valuation. Which brings us to the second number that’s contributing to the decimation of Twitter’s stock: 9 million. That’s the total number of monthly active users the company added in the fourth quarter (with just 1 million in the U.S.), or 4% growth relative to the prior quarter. Twitter now has 241 million monthly active users, which is barely a fifth of Facebook’s total. (Twitter doesn’t do investors the courtesy of disclosing daily active users — which is the key segment of the user base.)

The slowdown in user growth raises the spectre that Twitter will remain a niche product instead of achieving widespread mainstream appeal. I think that concern is valid, as Twitter is less user-friendly and its utility less obvious than Facebook’s.

Twitter’s quarterly results provide investors with a new baseline with which to revisit the stock’s valuation. Yesterday’s correction looks more than warranted — and there could be more to come; it’s an object lesson in the perils of placing a high multiple on a business that shows promise, but which remains fundamentally immature.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Alex does not own shares in any of the companies mentioned.

More on Company Comment

Hand of person putting wood cube block with word VALUE on wooden table
Company Comment

Value has been building behind the Diageo share price

Despite the business growing, the Diageo share price first reached its current level just over 19 months ago and hasn't…

Read more »

Older couple walking in park
Investing Articles

5 stocks to buy for high and rising dividend income

I can see a host of shares to buy on the FTSE 100 offering me exceptional levels of income. Here…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I don’t care if FTSE 100 shares fall further, I’m buying them today

I'm happy to go shopping for FTSE 100 shares today, even though I accept that they could have further to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Rolls-Royce shares are down 18% in a month and I’m finally going to buy them

Investors who bought Rolls-Royce shares have been repeatedly disappointed, but I'm willing to take a chance on them before they…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

How I’d invest £10k in a Stocks and Shares ISA today

Now looks like a good time to buy cheap FTSE 100 shares inside a Stocks and Shares ISA. These are…

Read more »

Black father holding daughter in a field of cows
Investing Articles

Today’s financial crisis is the perfect moment to buy cheap shares

I'm building a portfolio of FTSE 100 stocks by purchasing cheap shares whenever I see an opportunity. There's a good…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

I’d buy Tesco shares in October to bag their 5.4% yield 

Tesco shares have fallen lately but I think this makes them attractively valued for a dividend stock I would aim…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I would do anything to hold Diageo in my portfolio (but I won’t do that)

Diageo is one of my favourite stocks on the entire FTSE 100 and I'd love to hold it, but one…

Read more »