Yahoo Finance Twitter Earnings Reveal Larger Issues for TWTR Stock
Twitter (TWTR) reported second-quarter earnings on Tuesday, and investors were not impressed. TWTR stock plunged 12 percent as Wall Street lamented a revenue miss and exceptionally poor third-quarter revenue guidance.
The problems are manifold, but the most glaring issue is slowing revenue growth as Twitter struggles to get advertisers to devote meaningful shares of their ad budgets to the social network.
Year-over-year revenue was up 20 percent to $602 million, missing expectations for $608 million. That growth rate was also sharply lower than last quarter, when TWTR grew revenue by 36 percent.
But investors, by their nature, are forward-looking -- and that's where Twitter really dropped the ball. Its guidance for third-quarter revenue between $590 million and $610 million, well below the $682 million analysts were hoping for.
[See: 10 Tips for Couples and Young Families to Build Wealth.]
While adjusted earnings per share came in at 13 cents, 3 cents higher than the Wall Street consensus, the revenue shortfalls were simply too much to overlook.
Simply put, Twitter is stuck between a rock and a hard place, and it hasn't proven that it can wiggle its way out.
With Alphabet (GOOG, GOOGL) and Facebook (FB) gobbling up the lion's share of digital advertising dollars, Twitter is left fighting for scraps against much larger and better-funded competitors. Microsoft Corp. (MSFT), which owns Bing and MSN, also competes there, and with Yahoo (YHOO) being absorbed into Verizon Communications (VZ), which also owns AOL, those scraps don't come easy.
Twitter CEO Jack Dorsey understands this problem, and at the moment seems content not to solve it. Instead, he's trying to turn Twitter to a more video-centric platform, inking deals with the NFL, NBA, NHL, MLB, Wimbledon, and even the Republican and Democratic National Conventions to live-stream events on the social network.
"The only silver lining appears to be their bet on live-streaming sports, but can the company really wait a few months for those games to kick in?" says James Gellert, CEO of Rapid Ratings, a financial health ratings firm. "Long term, this could be a good strategy for them, but they may have to continue to spend money to show any ROI."
In going after live video, Twitter aims to go after traditional TV advertising budgets. There's only one problem: Facebook and Google have the same idea, and Twitter's efforts don't seem to be catching on.
While Twitter was sure to emphasize how important video was going to be in its evolution, it also carefully hedged its language. "It will take time for marketers to understand the impact of video ads on mobile vs. the alternative. To unlock budgets, we will also need to launch additional features and functionality over the next few quarters," it cautioned in its Q2 letter to shareholders.
[See: 10 Ways to Play in the Asia-Pacific Stocks Pool.]
K C Ma, finance professor at Stetson University in Florida, has his doubts.
"Twitter has struggled and failed to grow their user base over the years by strategically shifting from fix the product and revenue will come to build a live mobile video business. We think the change seems too late and too little," he says. "We worry that the real-time streaming space is already over saturated that eventually everyone will do it.
There are other problems, too.
Perhaps most notably, user abuse on Twitter has reached a fever pitch; recently, "Ghostbusters" and "SNL" star Leslie Jones said she was quitting the service after receiving a barrage of racist and sexist tweets from online harassers.
Twitter identified safety as one of the five areas it would focus on this year in its shareholder letter. However, the letter also touted the improved ability to block other users as a meaningful achievement, despite the fact that blocking is woefully inefficient in high-volume attacks by largely anonymous users, like the one directed against Jones.
It's little wonder that Twitter's user growth remained a glaring issue in the second quarter, as the company grew its monthly active users just 3 percent from last year to 313 million. Twitter's tepid user growth has been one of the company's most noticeable weaknesses, and investors have no reason to believe that will change anytime soon.
Analysts are taking a decidedly bearish tone on Twitter after its latest quarter. Canaccord Genuity, Axiom Capital, and Cantor Fitzgerald all downgraded TWTR stock from buy to hold, and Stifel, Wedbush, and RBC Capital Markets each lowered their price targets.
Twitter has a lot on its plate: Attracting TV ad budgets, stamping out user abuse, reigniting user growth and generally jump-starting revenue growth is no small task. But if Twitter doesn't want to end up like Yahoo -- a largely irrelevant digital property that couldn't fend off the dominance of Facebook and Google -- it needs to address all these issues pronto.
[Read: 5 Smart Investment Moves to Make Before Marriage.]
If it doesn't, TWTR's post-earnings meltdown may pale in comparison to longer-term underperformance.
More From US News & World Report
