by Clement Thibault
Twitter (NYSE:TWTR), the short-form social media platform, is set to report Q4 2016 earnings before the market opens on Thursday, February 9. The company is expected to report EPS GAAP of $0.11 and non-GAAP of -$0.15, on $739 million in revenue.
1. User Growth
Like all social media networks, user growth is seen as one of the key metrics in evaluating future prospects for the business. Unfortunately, Twitter's user growth has been problematic, to say the least.
When Twitter started trading publicly in late 2013, it was showing 25% growth in users year-over-year. However, that number has been steadily eroding over the past three years. User growth has become so anemic that during the past three quarters it's dropped to just 3% per quarter. While Twitter says it has an average monthly user count of 317 million, to understand the social network's true potential—and current inability to get there—this number is best considered in comparison to Facebook (NASDAQ:FB), which is still showing robust user growth. During its last quarterly report, FB said that for the 30 days prior to the report (ie a month-long span) it averaged 1.86 billion users.
2. Trump Bump
Perhaps the brightest area of potential growth for Twitter could come from its use as a platform for political messaging and discourse, a move already partially pioneered by none other than the tweeter-in-chief himself, US President Donald Trump. Indeed, it sometimes seems as if Trump is constantly tweeting, whether from his personal account @realDonaldTrump, or from his presidential account @POTUS. He uses the platform for multiple purposes—to call out companies and people he wants to praise or censure; to bypass traditional media, and to generally speak his mind without any censorship.
Twitter was a communications staple of President Trump's campaign, and it continues to be his messaging medium of choice. That's good news for the company, for a number of reasons.
First, this unprecedented access to the thoughts, emotions and opinions of the leader of the free world lures users to the platform in order to listen to, discuss, and argue his statements. It is reasonable to assume that President Trump's heavy usage alone can partially explain the growth analysts are expecting of TWTR in Q4.
Second, Trump's campaign was very much based on anti-establishment and anti-media sentiment, which both led him to Twitter. Using the platform allowed him to continually stoke the flames. With two major political events in Europe coming up in 2017—German and French presidential elections—it wouldn't be surprising to see political parties mimic similar tactics given Trump's immense success with the Twitter platform. Of course, this would lead to more exposure for the platform across Europe.
Twitter desperately needs a catalyst for positive user growth. Politics might just do the trick.
3. Monetization
Eventually the purpose of every business is to make money and if publicly traded, to reward shareholders. As with user growth, Twitter's quarterly revenue growth is slowly grinding to a halt. Year- over-year growth that exceeded 100% was once the norm for Twitter. Indeed, that was its standard of performance during its first year as a publicly traded company, through the full four quarters of 2014. Astoundingly, during its last quarterly report, the company reported a paltry 8% for revenue growth, its first ever report below 10% growth.
A number of factors are affecting Twitter's top line. To begin with, there's no question competition is eating Twitter's lunch. Internet giant Alphabet (NASDAQ:GOOGL) and leading social network Facebook continue to receive the lion's share of corporate social media advertising budgets. This is directly linked to subpar user growth since advertisers prioritize gaining exposure to new demographics and additional potential consumers. While Facebook will continue to lead here, renewed user growth should enable Twitter to capture a larger slice of the advertising pie.
Twitter's monetization choices aren't doing the company any favors either. Today, the bulk of Twitter's revenue comes from promoting paid tweets, paid accounts, and even paid trends. While this provides some revenue ($544 million last quarter), it simply isn't enough. Twitter must find other ways to derive revenue from its user base and the 500-million tweets they send each day (that’s almost 6,000 tweets a second).
4. Management Stability
On January 24 of 2016, news broke that four of Twitter's top executives—among them Kevin Weil, head of product and Katie Stanton, head of media—were leaving the company. That was just six months after Dick Costolo, who had been the CEO of Twitter from 2010-2015, stepped down. At the time of Costolo's departure, in July of 2015, Jack Dorsey, Twitter's co-founder and one-time CEO—who had famously been fired by Twitter's board in 2008, then went on to found Square (NYSE:SQ) in 2010—was brought back to head up Twitter, even as he continued to run Square, taking it public at the beginning of 2016. In other words, since his return, Dorsey has been a de facto (or worse) part-time CEO for the struggling messaging platform.
When Dorsey returned to Twitter, initially as interim CEO, its stock was hovering around $35 per share. Since then, and even after he was finally named permanent CEO, the stock has mostly headed lower, closing yesterday at $18.26 a share.
The only time the stock saw significant gains during the past few months was when a late September report about the company possibly being acquired briefly made the rounds. Potential suitors included Google, Salesforce (NYSE:CRM), Verizon (NYSE:VZ), Microsoft (NASDAQ:MSFT) and Disney (NYSE:DIS). Ultimately none of the companies named were willing to shell out the necessary funds for the struggling company.
Whether Twitter's key executives left on their own terms or were forced out is immaterial; it's a red flag either way. Something is awfully wrong when a struggling company's top brass exits en masse to pursue other opportunities. And though Jack Dorsey was brought back because he's a 'visionary' and would 'save the day,' not much saving has occurred thus far.
Conclusion
Twitter desperately needs genuine leadership and some real vision, both of which are seriously lacking right now. Still, we continue to believe Twitter has enormous potential.
When events occur—whether locally or globally—when news breaks, indeed, whenever there's anything worth knowing and sharing with or from friends, communities, celebrities, government leaders and organizations, Twitter is almost always the communications platform of choice, for both its immediacy and shareability. A well-timed tweet can still travel faster and farther than most other media.
Unfortunately for Twitter, however, it's no longer operating in a vacuum. Facebook is now being used as a direct line of communication between politicians, celebrities and their fans and followers. Instagram and Snapchat also allow users to share images and videos with increasing immediacy.
Chatter from investors hoping that Twitter will be acquired in the near future hasn't abated, even after last fall's flurry of rumors fizzled. While a rich, motivated suitor would probably provide a nice boost for any new positions at the stocks current price, the unending acquisition buzz from stakeholders speaks volumes about the lack of trust in Twitter's current management and the future of its corporate independence.
If tomorrow Twitter reports strong user growth in Q4, its share price will undoubtedly rise, possibly as much as 10% or 15%. However, that still wouldn't address the remaining, longer-term issues plaguing the company. For now, we would advise staying on the sidelines until the company's situation becomes clearer.