Twitter Inc.’s (TWTR, Financial) monthly active user base has started growing, but the stock price has barely moved. The stock is up by a mere 4.6% in the last year and continues to trade lower than its initial public offering price of $26 - and far from the price it closed at on its first trading day: $44.94.
The market is clearly not impressed with the social media company’s first-quarter 2017 performance, which saw it add 9 million monthly active users while also increasing daily active usage for four consecutive quarters. One reason for the lukewarm response could be the company’s first-quarter revenues, which slipped 8% during the quarter compared to last year.
Twitter’s revenues have been sliding for the last four quarters. In first-quarter 2016, the company's revenue grew 36% year over year, second-quarter 2016 revenues grew by 20%, third-quarter 2016 by 8%, fourth-quarter 2016 by 1% and, finally, declined 8% in the most recent quarter. The negative momentum is certainly of concern, and it continues to be a major factor behind the downward pressure on Twitter’s stock.
While the company has grown its user base by nine million, it lost nearly $57 million in advertising revenues compared to last year. The average revenue per user has dropped while the user base has expanded. There could be two reasons for this, either user engagement declined sharply or advertisers paid far less this year compared to last year.
Ad engagements grew 139% during the first quarter, which is lower than last year. What caused the most damage was cost per engagement dropping by 63% during the quarter. Advertisers pushed the cost of Twitter ads down, causing advertising revenues to decline.
Fortunately, this not an irreversible problem. Market forces are taking advantage of Twitter’s position by pushing prices lower. This is affecting Twitter’s revenues as well as stock price. But as long as the monthly active user base keeps growing, this number can easily be brought back on track. For a social media company, the user base is everything, and any momentum will help amplify the network effect. If the company manages to add millions of users in subsequent quarters, Twitter is well worth the risk.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
