Twitter’s Earnings and User-Growth Paradox

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By Jacob Maslow

Twitter IPO NYSE
New York City, USA – November, 7 2013: Banner on the New York Stock Exchange marking Twitters IPO in Lower Manhattan on November 7, 2013.

The interesting thing about Twitter (NYSE:TWTR) is that, when it went IPO, analysts thought it would continue to grow while its earnings would lag. Well, it appears that the opposite is happening. While Twitter earnings are pleasantly surprising a lot of people, its user growth has given many company observers reason to doubt the company’s long-term prospects. In terms of revenues, the company’s ability to generate sales has blown away most people’s expectations. When Twitter first became a public company, a lot of its critics simply wrote off its ability to generate much money. They didn’t really see much ad revenue coming from Twitter. Boy, have they been surprised?

In the past quarter which ended in December 31, Twitter’s revenues hit the $479 million mark. That means that Twitter is making roughly $2 billion a year in revenue – not bad for a company that allows users to send 140-character messages. The disappointing news, however, is on the user front. We have already heard reports that a disturbing percentage of Twitter users are actually not real people. These are software-driven bots and automated accounts. It is on the user-growth front that Twitter is experiencing serious headwinds. It simply isn’t growing as fast as analysts would like it to grow.

The reason why many analysts want Twitter’s user base to grow is they completely understand that Twitter has a high burnout rate. If you are reading this and you have used Twitter in the past, you know exactly what I am talking about. It is easy for people to get excited about Twitter for the first two weeks. However, by the time a couple of months roll around, you probably are no longer using your Twitter account. Guess what. You are hardly alone. This is the major structural problem that Twitter faces.

Another key issue is that a lot of Twitter’s features can be easily reverse engineered by its larger competitors. I am, of course, primarily talking about Facebook (NASDAQ:FB). Facebook has already implemented a hashtag system. Who knows how long Twitter has until a competitor completely eclipses it?

Still there is a lot of good news regarding Twitter’s stock. One piece of good news is that Twitter tweets will now show up on Google (NASDAQ:GOOG). This makes for a great traffic partnership. This may translate to even more ad sales for Twitter.

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