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What's Wrong with Twitter?
05/01/2014 11:00 am EST
This social media company's investors and employees have been wondering whether they should or shouldn't sell their stocks, especially given last night's disappointing first quarter report, and MoneyShow's Jim Jubak lays out several reasons for the dilemma.
Sell or hold?
That’s the question running through the minds of all those Twitter (TWTR) early round venture capital investors and company employees today, after the company’s disappointing first quarter report last night. On May 5, the lockup expires on 489 million (or more) Twitter shares. Early round investors and company employees, who have been prohibited from selling their shares for six months after Twitter’s IPO (initial public offering), will be able to sell. (Company executives said back in April that they wouldn’t sell on the expiration of the lockup.)
Twitter’s IPO was priced at $26 a share and the stock soared as high as $74.73, as these shareholders watched, unable to sell. After today’s 9.9% drop on the first quarter earnings report, the stock traded at $38.40 as of 2:30PM New York time.
Sell or hold? What would you do after May 5? The answer, obviously, will have a huge impact on the price of Twitter shares. 489 million shares is a lot of shares.
My bet is that a lot of these shares will hit the market, sold by employees and early round investors worried by the drop from the 52-week high of $74.73 to $38.40.
What was wrong with Twitter’s first quarter report?
Growth was way slower than expected.
The number of monthly users worldwide grew to 255 million as of the end of the March quarter. That was a 5.8% increase from the 241 million monthly users as of the end of the December quarter. The 5.8% growth was an improvement from the 4% growth in monthly users recorded in the December quarter, but it isn’t enough of an improvement to eliminate fears that Twitter’s growth has topped out way short of the 500-600 million monthly users that Wall Street is counting on to justify the company’s $21.7 billion market capitalization.
The bad news didn’t stop with the anemic growth in monthly users. Engagement by those users also stagnated in the period. On average, users refreshed their Twitter feeds 614 times a month during the March quarter. That was up only slightly from the 613 times a month in the December quarter. Both of those refresh rates are below those the company was seeing in the first quarter of 2013.
And finally, and most worrying for investors who want to know when Twitter will make money, the company reported that it made $1.44 in advertising revenue for every 1,000 timeline views. That’s down from $1.49 per 1,000 timeline views in the December quarter.
Revenue for the quarter climbed 119% to $250 million in the first quarter from the first quarter of 2013. That was above Wall Street projections of $241 million. Twitter’s loss for the quarter rose to $132 million, up from $27 million in the first quarter of 2013. Adjusting earnings to exclude the stock-based compensation the company paid to employees in the quarter, earnings were $183,000 or roughly breakeven. (Why stock-based compensation should be excluded from profit/loss calculations is beyond me. The dilution from issuing more shares does reduce the earnings per share for investors. But this is a game that Wall Street and companies like to play).
In the wake of these results, Wall Street hauled out some unflattering comparisons to Facebook (FB). Only 22% of US adults who are online in any month visit Twitter at least once a month, according to market researcher Forrester. The comparable figure for Facebook is 72%.
Twitter’s current forward price to earnings ratio, based on estimated 2014 earnings per share, is 1069. Makes Facebook, at a forward PE of 41, look like a value stock.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Twitter or Facebook as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.