Consider this a dispatch from the Death of Momentum™ , now playing out across trading screens all over the world as reality catches up to expectations, while expectations catch up to valuations. Today’s episode: The Death of Twitter meme, which you will no doubt be reading about (and, ironically, tweeting about, throughout the rest of the day).
As of this writing, Twitter’s down 10% after releasing good-not-great earnings last night. For context, Twitter shares are now cut in half from their late December high and are currently selling four bucks below their IPO-day close. The company has lost roughly $22 billion in market cap this year – the equivalent of one Michael Kors (KORS) or ten Buffalo Wild Wings (BWLD) – quite a sum of invested capital to see vanish in a short period of time.
More than ten analysts have slashed their price targets this morning and journalists are pondering the death of the social network in its entirety owing to the fact that its user base (now 255 million globally) is barely growing. The comparisons with Facebook (worth $160 billion or so with $1.3 billion accounts and explosive usage / financial growth) are starting to look more and more ridiculous – despite the fact that Facebook also got cut in half from its IPO price in its first year. Something about Twitter and its business momentum just feels off, its share price momentum (to the downside) simply underscores that.
Before continuing, a disclaimer: I am personally long a small amount of Twitter that I bought on the day of the IPO. I’ve not traded it before or since, nor do I have any plans to at the moment.
Okay. First, some numbers from the Q1 earnings report, courtesy of my pal Bob Peck at SunTrust (who’s been neutral on the stock because of valuation concerns):
Twitter reported a strong quarter and inline guidance, driven by improving monetization across US and Intl markets. Revenues per TimeLine View accelerated to 78% growth in the US from 73% and 154% Int’l from 140%. However, Monthly Active Users (MAUs) of 255m decelerated a bit further to 25% from 30% growth and TimeLine Views (TLV) per MAU (i.e., engagement) declined 3% y/y in the US and 10% y/y Int’l.
• Revenue per 1000 Timeline Views (TLVs) of $1.44, accelerated to +94% y/y vs. 76% in 4Q. In the US it was $3.47 per TLV, +78% y/y vs. 73% in 4Q.
• On an ARPU basis, Twitter earned ~$2.86 in the US compared to Facebook’s $5.16. Twitter’s monetization grew at a similar rates to FB for the quarter (73% vs. 81%), but still represents just ~55% of FB’s rate on the materially lower ad load.
• Mobile useage continues to expand, now 80% of revenues vs. 60% last yr.
• Ad engagements were +28% q/q while avg cost per engagement was -20%.
• DAU/MAU, a common engagement ratio remains in the high 40% (we est. 48%) vs. ~46% in 2Q last year. This compares to 63% for Facebook.
• EBITDA margin of 15% was ahead of estimates and on pace for ~16% for the FY2014, a 500bps improvement vs. FY2013.
If you’re not overly familiar with some of these metrics, it’s because they hadn’t existed on Wall Street prior to 2012. It’s a new world, yada yada. But the numbers themselves aren’t terrible. The problem is that investors’ expectations were way ahead of the company’s actual growth trajectory even before the IPO. And with the way the Nasdaq had been acting, it didn’t much matter this winter – growth was hot and promise was in the air. The fact that the music stopped this spring is probably more to blame for the recent disgust with this company than anything else.
Over at TheStreet.com, Herb Greenberg is making the case that Twitter didn’t screw up, Wall Street did – with lofty demands that the young company couldn’t possibly have delivered on:
In the end, I blame this not on Twitter but on Wall Street. Twitter’s mistake, I would argue, was going public. At that point it became fodder for the Wall Street overhype machine, which has a history of taking good names and products and somehow making them appear as damaged goods….
As a public company Twitter no doubt — and for better or worse — is being forced to make changes faster than it otherwise might have.
But as a public company, it can’t get from here to there without the type of scrutiny — pegged to a stock price — that could demoralize executives and employees who are suddenly put on the defense when all they are trying to do is create and improve something they believe is great.
Reality: I speak from experience. I was at TheStreet (TST) when it went public in 1999. I had a good slug of founder’s stock and options. We had a great product, an enthusiastic staff and, on paper, we all were richer than the day before.
Then reality struck: We weren’t as good a business as Wall Street led us to believe we were, and the stock, which peaked around $70, collapsed to $1.
But of course, Twitter is no TheStreet.com – even if the current letdown in social (LinkedIn has also been cut in half) is starting to remind us of the first wave of dot com names of a generation ago. The reality is that the scale is now much bigger, as is the scope of what these companies can mean to users. In addition, these are actual businesses now, with actual earnings and revenue beneath the superficial layer of DAUs and “engagement rates.” Yes, we’re looking for more eyeballs again – but this time we have shit to sell those eyeballs.
The bigger issue, however, is not about the stock but about the company and the platform. If Twitter itself is facing an existential problem, one quarter’s worth of earnings won’t much matter. The commentary revolving around the platform is beginning to feel funereal. The Atlantic just published a “eulogy” for Twitter this morning, complete with the below graphic:
The truth is that most people who come across the article will probably do so because someone shared it on Twitter. So perhaps a eulogy may be a bit premature – but I get where the authors are coming from in terms of the experience of the network feeling different…
The publishing platform that carried us into the mobile Internet age is receding. Its influence on publishing will remain, but the platform’s place in Internet culture is changing in a way that feels irreversible and echoes the tradition of AIM and pre-2005 blogging. A lot of this argument comes down to what we feel. Communities can’t be fully measured by how many people are in them. So as we suss out cultural changes, relying on first-hand experience is a first step.
Twitter used to be a sort of surrogate newsroom/barroom where you could organize around ideas with people whose opinions you wanted to assess. Maybe you wouldn’t agree with everybody, but that was part of the fun. But at some point Twitter narratives started to look the same. The crowd became predictable, and not in a good way. Too much of Twitter was cruel and petty and fake. Everything we know from experience about social publishing platforms—about any publishing platforms—is that they change. And it can be hard to track the interplay between design changes and behavioral ones. In other words, did Twitter change Twitter, or did we?
The authors make some compelling points about tediousness and fragmentation – but for someone like myself, Twitter at its very worst is infinitely more useful and entertaining than Facebook at its very best. The problem is, most people aren’t like me, I suppose. Facebook users are the mainstream and us newshounds, pundits, commentators and jokesters are too weird for everyone else who isn’t one of us.
The real question then, for investors and analysts, is whether or not Twitter – at one fifth the size of Facebook – can still be a great business. I think it can be – just maybe at a smaller size than The Street had initially hoped for. The adjustment process as hopes are deflated and estimates are recalibrated is bound to be a painful one.