Twitter (TWTR, Financial) released its results for the second quarter and took the Street by surprise, sending shares up 28% after hours. Excluding the effects of share dilution from stock-based compensation–a major bugbear of mine–Twitter turned a profit of $0.02 per share.
Revenues came in at $312 million, beating the consensus estimate of $283 million by a wide margin. And the number of monthly active users (“MAUs”) rose to 271 million vs. the consensus estimate of 267 million.
That’s the good news. Now for the bad news: Twitter is still not growing anywhere near fast enough to justify its current valuation multiples.
Assuming Twitter generates something in the ballpark of $1.2 billion in revenues this year, Twitter’s stock would still be trading at 24 times sales. Again, that’s sales, not earnings. That’s even more expensive thanFacebook’s (FB, Financial) 19 times sales, and remember, Facebook is a vastly more profitable company. Google(GOOG, Financial)–with which FB and TWTR compete for ad revenues and user time–trades for a comparably puny 6 times sales.
I gave my thoughts on Twitter to CNBC’s Ansuya Harjani:
If I may generalize, Facebook has become a real-time high school reunion and a great medium for sharing photos. Twitter, on the other hand, is a medium for sharing news links and making announcements. It’s a media company and a fantastic medium for celebrities, politicians and journalists, but it will probably never have the broad, mass appeal of Facebook nor its intimacy. And we should remember how our expectations have changed: Last quarter, new users were up by a comparable amount, and the street took that as a disappointment. So, while Twitter beat expectations, expectations were lower.
Twitter CEO Dick Costolo stressed that the bump in monthly active users was NOT due to the World Cup. He said that the World Cup did boost engagement among users, however, and I would agree with that. You see a similar effect in the United States during the Superbowl. Fans use Twitter as a medium to banter back and forth on the games, to give virtual high fives, and to share the grief (or rage) after a loss.
The more time a user spends on Twitter, the more valuable they are to advertisers because the more likely they are to see an ad an (ideally) to click on it. Furthermore, with Twitter users more engaged during the World Cup, my assumption is that advertisers were willing to pay more. That’s great for this past quarter, but it isn’t something we should expect to see repeated.
Facebook has been extremely successful in boosting engagement and revenue per user from its North American user base. Twitter has struggled to keep on on this front, perhaps partially because its user base is more international. Social media companies have not been particularly good at monetizing users outside of North America. Twitter’s user base is overwhelmingly outside North America yet only accoutns for 33% of total revenue.
Also, there is one major negative that everyone seems to have glossed over. On a GAAP basis, which takes into account the effects of share dilution from stock-based compensation, Twitter actually lost money last quarter. Twitter’s stock based compensation is a major bugbear for me, and a reason I tend to have a negative bias towards the stock.
Last week, I appeared on CNBC to discuss Facebook’s earnings, noting that while Facebook’s user growth is largely in Asia and emerging markets, its revenues come disproportionately–almost exclusively–from North America. Given that Twitter’s user base is disproportionately from outside North America, it remains to be seen if Twitter will succeed where Zuckerberg and company are not.
