The 2 Numbers Decimating Twitter's Shares
Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
U.S. stocks closed marginally lower on Wednesday, as the benchmark S&P 500 index fell 0.2%, while the narrower Dow Jones Industrial Average was down by just three-hundredths of a percent. Meanwhile, microblogging platform Twitter reported its first set of quarterly results as a public company after the market's close to the market's great displeasure -- shares were down 18% at 6:32 p.m. ET.
Source: Twitter.
The direction -- and intensity -- of the market's reaction to Twitter's results is surprising, at first glance. After all, most of the company's numbers look good, even great, relative to Wall Street's expectations, as the following table demonstrates:
Metric | Wall Street's Consensus Estimate Before the Earnings Release | Actual/Company guidance |
|---|---|---|
Q4 revenue | $217.8 million | $242.7 million |
Q4 earnings per share | ($0.02) | $0.02 |
Q1 2014 revenue | $215.2 million | $230 million-$240 million |
Q1 2014 EBITDA | $16.6 million | $10 million-$16 million |
2014 full-year revenue | $1.13 billion | $1.15 billion-$1.20 billion |
2014 full-year EBITDA | $143.5 million | $150 million-$180 million |
Sources: Thomson Reuters I/B/E/S, Twitter.
The only "miss" is with regard to EBITDA in the current quarter (the third line), where Twitter's guidance range of $10 million to $16 million fails to meet analysts' consensus estimate of $16.6 million, but that shouldn't be all that upsetting, considering that the company's guidance for full-year EBITDA is well above the consensus estimate. (EBITDA, or earnings before interest, taxes, depreciation and amortization is a proxy measure for cashflow.)
As such, the after-hours stock price reaction suggests that the market's expectations were substantially above those of Wall Street analysts. Which brings me to the first number that is causing investors to decimate Twitter's shares this evening: 37. That was Twitter's enterprise value-to-EBITDA multiple as of yesterday's market close -- roughly three times Facebook's! The growth expectations implied in that multiple are phenomenal, and as I speculated this morning:
Given the 150%-plus run-up in Twitter's stock price from its IPO, I have a hard time seeing how this afternoon's results will satisfy market expectations (although perhaps this is a failure of imagination on my part). Investors ought to be prepared for a share price decline, one that could be significant.
Still, there has to be more to it than that -- a catalyst that planted a genuine doubt in investors' minds regarding whether Twitter can ultimately achieve the sort of growth that would justify its valuation. Which brings us to the second number that;s contributing to the decimation of Twitter's stock: 9 million. That's the total number of monthly active users the company added in the fourth quarter (with just 1 million in the U.S.), or 4% growth relative to the prior quarter. Twitter now has 241 million monthly active users, which is barely a fifth of Facebook's total. (Twitter doesn't do investors the courtesy of disclosing daily active users -- which is the key segment of the user base.)
The slowdown in user growth raises the specter that Twitter will remain a niche product instead of achieving widespread mainstream appeal. I think that concern is valid, as Twitter is less user-friendly and its utility less obvious than Facebook's.
Twitter's quarterly results provide investors with a new baseline with which to revisit the stock's valuation. This evening's correction looks more than warranted -- and there could be more to come; it's an object lesson in the perils of placing a high multiple on a business that shows promise, but which remains fundamentally immature.
Better than Twitter: The one stock you must own in 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.
The article The 2 Numbers Decimating Twitter's Shares originally appeared on Fool.com.
Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends Facebook and Twitter and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
