Twitter Inc.’s (TWTR, Financial) bad 2016 just got a little worse as the company missed its fourth-quarter earnings on the sales front while posting better-than-expected EPS numbers.
Earnings per share for the quarter came in at 16 cents with revenues of $717 million. Wall Street was expecting earnings of 12 cents per share on revenues of $740.1 million.
More than earnings, I strongly believe that user base growth is what investors should be expecting from the company. If that number keeps expanding, Twitter’s revenue, as well as the stock price, will have a chance to recover.
Unfortunately, user base growth only increased 4% year over year during the quarter. In the last four quarters (fiscal 2016), Twitter’s user base has grown by 14 million monthly active users, with the U.S. count increasing by a mere 2 million. For comparison’s sake, Facebook Inc.’s (FB, Financial) monthly active user base in North America expanded by 92 million during the same period.
The huge difference between Facebook’s growth metrics versus Twitter’s in a highly developed English-speaking market is not at all good news for the company. If Twitter cannot grow in this market, its opportunities in overseas markets is going to be questionable. Facebook has 606 million monthly active users in the U.S. and Canada, while Twitter has a mere 67 million in the United States. Unless this starts growing, the company is going to stay in trouble.
"While revenue growth continues to lag audience growth, we are applying the same focused approach that drove audience growth to our revenue product portfolio, focusing on our strengths and the real-time nature of our service. This will take time, but we are moving fast to show results," CEO Jack Dorsey said in a statement
But the problem was never about revenue growth. The investing community has already gone beyond the point of pondering over earnings numbers - as long as sales or the customer base keep expanding. Salesforce.com (CRM, Financial) has been a market darling despite having nothing to show for the bottom line, and it is only because its top lines keep improving. When Facebook started off, there was hardly anything at the top or bottom line, but the market saw its user base expanding at a stunning rate and latched on for the ride.
If the user base grows, the market will be more than willing to assign a higher valuation for the company. After that, revenues will evenutally catch up. But if Twitter is going to add less than 15 million users in one year, the market is going to wait for a reason why it should buy its story.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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