Last quarter was a victory for Twitter Inc (NYSE:TWTR), technically speaking. Twitter topped sales and earnings estimates, and most metrics improved either year-over-year or sequentially.
Were it any other company, though, such minimal growth likely wouldn’t have resulted in the bullish response that Twitter stock has dished out after third-quarter earnings.
For the quarter ending in September, Twitter earned an operating profit of 13 cents per share, up from 10 cents in the year-ago quarter.
That came on $616 million in revenue, which was better than Q3 2015’s $569.2 million worth of sales.
Perhaps more important, its Q3 numbers beat expectations for a profit of 9 cents per share and a top line of $604 million.
The beat on both fronts has pushed Twitter stock higher to the tune of 2%.
However, once the market has a chance to review the numbers that Twitter didn’t tout, TWTR traders might not feel quite so bullish.
The Rest of the Twitter Earnings Story
CEO Jack Dorsey commented on the organization’s third-quarter numbers:
“Our strategy is directly driving growth in audience and engagement, with an acceleration in year-over-year growth for daily active usage, Tweet impressions, and time spent for the second consecutive quarter. We see a significant opportunity to increase growth as we continue to improve the core service. We have a clear plan, and we’re making the necessary changes to ensure Twitter is positioned for long-term growth. The key drivers of future revenue growth are trending positive, and we remain confident in Twitter’s future.”
It is true that Twitter is trending positive by most measures of future revenue growth. But that trend hasn’t necessarily reached escape velocity.
Some would even say the trajectory is tapering off far too soon.
Case in point: Last quarter’s year-over-year revenue growth was a mere 8% — the slowest growth rate seen since Twitter’s late 2013 IPO. Year-over-year growth in monthly users was also a tepid 3%, carrying that figure to 317 million. That’s the third quarter in a row that Twitter’s average number of users per month has only grown by 3%. Meanwhile, rival Facebook Inc (NASDAQ:FB) mustered 15% growth in monthly users in its most recently reported quarter.
Dorsey’s optimism might be unmerited given the current pace of progress. Perhaps even more unmerited is the company’s goal of achieving GAAP (generally accepted accounting principles) profitability next year.
Looking Ahead for Twitter Stock
The profit and revenue numbers cited above? Those are non-GAAP measures, which exclude several real expenses that Twitter incurs. On a GAAP basis, Twitter lost $102.8 million for its third quarter. That is an improvement from Q3 2015, when the company lost $131.7 million. Sequentially, though, there’s no “improvement” trend in place for TWTR’s actual bottom line.
Still, there’s a glimmer of hope that Twitter is not only growing ad sales, but improving its overall efficiency.
The number of daily active users grew 7% last quarter, versus only 5% growth during Q2, and its cost-per-engagement fell 44% from year-ago levels.
Adjusted EBITDA was up 28% to $181 million, too.
Still, if Twitter is on a path to profitability — real profitability — for the coming year, it’s going to have to execute everything with perfection as well as be a little lucky.
Bottom Line on TWTR
For all of 2016, Twitter expects adjusted EBITDA to roll in between $700 million and $715 million, with EBITDA margins ranging from $27.5% to 28%. Those margins suggest a decline relative to the margins reported through the first three quarters of the year. And the expectation implies a Q4 adjusted EBITDA total of around $170 million — also no better than any of the EBITDA figures produced in any quarter this year so far.
Point being, if Twitter is going to finally move to GAAP-profitability, it won’t be starting that move until next year.
TWTR has set a very high hurdle for itself in light of the fact that it’s not even on a proven path yet. Throw in the fact that it’s cutting 9% of its workforce — and most of those are sales staff — and the company might find itself struggling just to grow the top line, let alone the bottom line.
Twitter stock remains more of a speculation than an investment.
— James Brumley
Source: Investor Place