Despite better-than-expected results, Twitter, Inc. TWTR has been sliding downward to a point where it has almost touched its IPO pricing. The stock closed at $29.27, down 5.61% in Monday’s trading, after falling to $28.91 on the day. This is the lowest the stock has ever plunged since its IPO, which was priced at $26.00.
Notably, the stock is down over 16.07% over the last 5 days and has lost around 18.4% of its market valuation year-to-date. On the other hand, rival Facebook, Inc. FB has gained 20% year-to-date, which is a clear indication of its predominance in the social media business.
In addition, the company still continues to report loss despite gaining significantly from its advertising business. Despite the top-line growth, it seems that the Street remains significantly concerned about Twitter’s user growth.
Twitter reported second-quarter 2015 results with a loss of 19 cents per share. However, the loss compared favorably with the Zacks Consensus Estimate of a loss of 24 cents. Revenues were also robust, increasing 61% year over year to $502 million and surpassing the Zacks Consensus Estimate of $488 million.
It seems that though the company reported better-than-expected results in the quarter, it failed to impress investors. The key reason for this is the soft outlook for user growth in the foreseeable future. In fact, Anthony Noto, its CFO had stated that the company does not expect robust user growth for a while. In the reported quarter, Twitter’s average monthly active users (MAUs) were 316 million, up 15% on a year-over-year basis. This is lower than the prior-quarter’s growth rate of 18%.
Noto also stated that Twitter has only penetrated 30% of the global market so far and the platform needs to be simplified to reach the mass market. He also said that the company will have to increase efforts to create value for target users by ramping up both its product and marketing programs.
Moreover we believe the recent management changes with the exit of CEO Dick Costolo and the company’s inability to attract suitable candidates for the office adds to the uncertainty. We also believe that from an investor‘s standpoint, the market is more drawn toward Facebook, which is also a significant threat to Twitter’s growth. The company has failed to showcase the kind of growth that Facebook has exhibited over the past years, be it in terms of its international expansion or rollout of new products and services to attract users.
Facebook has partnered with various media houses like New York Times, BuzzFeed, National Geographic, NBC, The Atlantic, The Guardian, BBC News, Spiegel and Bild to launch their instant articles. Facebook also acquired the startup Tugboat Yards in a bid to foray into the online publishing business. Further, it has changed its ad pricing policy to make it more advertiser-friendly. On the other hand, Twitter’s seems to lack the effort to lure potential customers. Although, the company redesigned its homepage so as to make public tweets accessible to non-members in order to increase penetration, the effort was too less and too late given the ever changing social media environment.
Other tech giants like Google Inc. GOOG and Yahoo! Inc. YHOO also remain a hurdle for the company in terms of its advertising business, which is the current key revenue driver for Twitter. Hence, it remains unclear how Twitter is going to cope with ever rising competition, given the lack of innovation in products and services and imminent management changes.
Currently Twitter has a Zacks Rank #3 (Hold).
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