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5 questions Twitter must answer

February 4, 2014: 1:32 PM ET
Investors are extremely bullish about Twitter's prospects. But can the company live up to the hype?

Investors are extremely bullish about Twitter's prospects. But can the company live up to the hype?

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

It's put up or shut up time for Twitter! The company will release its first "earnings" report since its initial public offering after Wednesday's closing bell.

Considering shares of Twitter (TWTR) are up about 150% from their IPO price -- even though the only news since November has been about what Wall Street analysts think of the stock -- it seems safe to say that expectations are high.

In honor of the number that we've all come to associate with Twitter, I've decided to give you lucky readers 140 questions that need to be answered in Twitter's report. Just kidding. That's a bit excessive. Even for a blowhard like me. So here are five.

1. Will Twitter actually report a profit? Twitter has lost money throughout its brief history. And those losses have escalated recently. The company reported a net loss of $64.6 million in the third quarter of last year, up from a loss of $42.2 million in the second quarter and $21.6 million in the third quarter of 2012.

But analysts are expecting a little less red ink in the fourth quarter. The consensus estimate is for a net loss of $13.1 million, which works out to a loss of 2 cents a share, according to Thomson Reuters. However, the estimates range from a loss of 13 cents a share to a profit of 4 cents.

I may be a traditionalist. But I think Twitter MUST show a profit to justify the huge run-up in the stock.

2. Is revenue growth already slowing?  Twitter is going to report extremely strong sales growth in the fourth quarter. But will it be strong enough?

Analysts are currently forecasting revenue of $218 million. That would be a 29% increase from the third quarter and 94% jump from the fourth quarter of 2012.

But if Twitter merely meets the consensus forecasts, you have to wonder if the momentum investing crowd will be disappointed. After all, this would actually represent a slowdown in Twitter's sales growth.

Related: Best way to contact your Obamacare insurer? Twitter

A year ago, Twitter's fourth-quarter revenue increased 36% from the third quarter. In the third quarter of last year, sales were up 105% from the same period in 2012.

Of course that's not to say that Twitter's report should be considered an #epicfail. Sales are growing like the proverbial weed. But any signs of slowing growth could make investors nervous. Twitter is not yet a mature company. It needs to beat estimates to keep investors happy.

3. Will Twitter give any guidance? When Google (GOOG) went public in August of 2004, the company's management team famously said they would not play Wall Street's guidance game. The company refused to give analysts and investors specific targets for earnings and sales outlooks.

Nearly 10 years later, Google is sticking to that philosophy. And Facebook (FB) adopted it as well, when it went public in 2012. Now both Google and Facebook have done just fine without spoon-feeding Wall Street. But will investors be willing to accept no concrete guidance from Twitter? Some might view a lack of detail from CEO Dick Costolo (who is still a relatively unknown commodity on Wall Street) as a worrisome sign.

Related: Twitter co-founder Biz Stone launches new app

Still, if Twitter does decide that it wants to give sales and earnings outlooks, then that creates another challenge. Twitter won't just need to crush the estimates for the fourth quarter. It will also need to give investors evidence that it is expecting a boffo first quarter as well. For what it's worth, analysts are  currently expecting Twitter to report sales of $215 million and a loss of 3 cents per share.

That may not cut it. While the first quarter is typically weaker for advertising-driven business like Twitter, revenue of $215 million is below what the company is expected to generate in the fourth quarter. And I can't stress this point enough. Twitter is a young company that investors are buying because they love its growth potential. A sequential decline in sales -- even if it is due to seasonality -- would be a big setback.

4. Is mobile already a mature business? To its credit, Twitter has embraced mobile. Unlike Facebook, which had to prove to Wall Street after its IPO that it had a viable mobile strategy, Twitter does not have to worry about investors wondering if too many people are using Twitter from their desktop computers as opposed to their smartphones and tablets.

Twitter has said that more than 70% of its ad revenue came from mobile devices in the first nine months of last year. That's #phenomenal. What's more, Twitter indicated that more than three-quarters of its users accessed Twitter from a mobile device in the third quarter. That's up from 69% in the third quarter of 2012. Also #awesome.

Related: Facebook earnings soar on strong mobile growth

But it leaves little room for growth. What can Twitter do for an encore? Is it reasonable to expect 75% of ad revenue from mobile and more than 80% of its users tweeting via mobile? (There needs to be an adverb form of mobile. Mobily? Mobilely? Mobly? Schoolhouse Rock anyone?)

Facebook's stock rebounded from its post-IPO doldrums. It went from nearly no mobile revenue to a point where it's now a majority of ad sales. I am not sure if there is a similar catalyst to excite Twitter investors now considering the stock has not stumbled since it went public. I can't imagine that growth in video service Vine is going to do it.

Unless ...

5. Can Twitter make more money off international users? Twitter is a global phenomenon. According to the company's last SEC filing before the IPO, it said it had 232 million monthly active users worldwide. Only 53 million of them were in the United States. The remaining 179 million were in international markets.

But here's the thing. Twitter also said that it generated just 26% of its revenue from international users in the third quarter. Twitter has to do a better job of making money outside the United States. It is wasting a huge opportunity if tweets in Europe, Asia and the rest of the world don't translate into ad sales.

Facebook, which also has a huge majority of its users living outside the U.S., is doing a better job of generating money from its international users: 53% of its revenue came from them.

Yes, investors are obviously going to be looking to see just how many new users Twitter added in the fourth quarter. A big jump from 232 million will likely generate some excitement, especially since Twitter clearly has a long way to go before it reaches the global domination levels of Facebook and its nearly 1.3 billion monthly active users.

But adding users for the sake of adding users is not the point. It only matters if you can make money off them. And that's why, even though I still loathe Facebook as a service and adore Twitter, I think Twitter is an overvalued stock with much to prove while Facebook has lived up to the hype.

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