Worries mounting for Twitter ahead of earnings report

Twitter (TWTR) will report its fourth quarter 2015 results after the market closes on Wednesday, but investors will be more focused on the social network's outlook for this year. If the recent crushing experiences of other Internet stocks is any indication, the outcome could add to the pain of long suffering Twitter shareholders.

Amid an earnings season where the slightest hint of disappointment has sent stocks down 10% or more, investors are already nervous about whether CEO Jack Dorsey's company will be the latest to get hit. One warning sign for Twitter investors is that stocks that were already weak heading into earnings, like LinkedIn (LNKD) and Tableau Software (DATA), have been absolutely crushed.

LinkedIn, the leading professional social networking service, had already lost 15% this year prior to its Feb. 4 report. Big data analytics firm Tableau was also down 15% before its Feb. 5 report. Both stocks dropped over 40% the next day as investors radically reassessed their prospects for future growth.
 
Twitter's results will follow a 15% slide over the past three days, a 38% loss so far in 2016 and 70% crash over the past 12 months.

Despite co-founder Dorsey returning as CEO in October, the stock has been buffeted by management turnover and a continued lack of a clear and compelling strategy to increase user growth significantly. Dorsey is also running payments startup Square (SQ), prompting further concerns that the charismatic leader may be stretched too thin. Twitter shares hit an all-time, intraday low on Tuesday of $14.31, a 45% decline from the company's price at its 2013 IPO.

Despite sales more than tripling over the past two years, Twitter has never been able to meet the outsized expectations dating from before the IPO that it could be the next Facebook (FB). Efforts to make the service easier to use or focus on breaking news, sports and celebrity events have fallen flat. On Wednesday, the company took another risk of turning off some hardcore users by rolling out changes to the way it displays tweets.

Investors remain focused on the problems, keeping pressure on the stock price, says Mizuho Securities analyst Neil Doshi, who rates Twitter shares "neutral."

"We remain concerned about recent executive departures, ability to grow the company's monthly active user base, and ability to gain traction among newer products like Moments," Doshi wrote on Tuesday.

Wall Street expects Twitter made an adjusted 12 cents per share of profit on revenue of $710 million, a 48% jump from a year ago, according to the average analyst estimate compiled by Factset. On its prior earnings call, Twitter said it expected revenue of $695 million to $710 million for the fourth quarter.

But the more important numbers will most likely be Twitter's outlook for the first quarter and full year of 2016. Analysts currently expect adjusted EPS of 8 cents in the first quarter and 55 cents for the year. Revenue is expected to come in at $633 million in the first quarter, which would represent a 45% increase, and $3.1 billion, an estimated 40% rise, for the year.

Aside from sales and earnings, Twitter's shares have fallen in the past based on weak growth in its base of monthly active users. The most alarming development would be actual shrinkage in the service's user base. That's never happened before, but Citigroup analyst Mark May this week cited Comscore data from December to warn that Twitter's monthly active user count could decline for the first time, although modest growth was a more likely scenario, he said.

Overall, analysts expect Twitter added 4.5 million to reach 324.5 million active users in the quarter, according to Factset, a 13% gain from 288 million reported a year ago.

Short interest in the stock also remains high, with almost 54 million shares borrowed and sold as of Jan. 15, the most recently disclosed data point. That's down from over 63 million in mid-December but still nearly double the level seen for most of 2015. That could lead to the unusual situation where a company reports a disappointing quarter but the stock price rises. Sometimes investors who have shorted decide that their negative outlook has reached fruition and cover their positions by buying shares.