Growing Pains for Twitter Inc?

This year has not been kind to most technology stocks, Twitter stands out from the crowd in its drop of over 50% year to date, in stark contrast to rival social-media site Facebook , which has gained 7% as of writing. Investors have been worried that Twitter will not live up to the hype built into its price. These fears have been fueled by lackluster user growth and a large amount of selling from insiders. So, is now a great buying opportunity, or is there more bad news to come? I will take a dive into Twitter's recent negative history and detail what the company might have on board.  

Disappointing earnings
On April 29 Twitter released its latest earnings report, beating analyst estimates for earnings ($0.00 vs -$0.03) and sales ($250.5 million vs. $241.5 million), but failing to significantly raise user base growth. The stock was promptly pounded; as a growth stock Twitter failed in its most important category: growing! Monthly active users only rose from 255 million from 241 million, a far cry from Facebook's 1.2 billion.

CEO Dick Costolo cited the difficulty of learning how to use Twitter as a problem. Though this learning curve could stop some users from coming back to Twitter after their first experience, ultimately people will work to learn something they want to be a part of. Twitter needs to work on becoming mainstream and converting some of Facebook's users instead of settling to be a niche, exactly what investors are worried about.

Insider sales
May 6 brought an even bigger decline for Twitter as investors were allowed to sell their locked-up shares -- the immediate result was a 18% fall. This negativity was completely opposite of the jump Facebook experienced when its lockup ended, up 3%, according to Reuters. Though Twitter had a more diversified ownership group, it still shows a lack of trust from the core group.

One key difference between Facebook and Twitter was that Facebook did allow a gradual sale of some shares from investors, to avoid the idea that insiders will be dumping shares at the first opportunity they get. Twitter, on the other hand, built all of the selling up into one day. As always with insider selling, situations arise where profits are ripe for the taking and investors need money to spend; aided by the long wait for original Twitter investors this might have been just the case.

The future
Twitter's number one goal in the future is continuation of user growth. This can be done through acquisitions, or changes to the Twitter network, such as improving the in-app messaging and profile customization.  Twitter's latest change has been enabling the "tagging" of other users in posted photos, a long-used Facebook feature. Another possible growth booster in the future is the expansion of 2012 acquisition Vine (a six-second-video-sharing service).

Though similar to Facebook's Instagram in the lack of ads/revenue, Vine has recently introduced a desktop version drawing comparisons to YouTube, according to CNBC. Twitter has kept Vine's user base under wraps, but unfortunately Vine is a niche within the video sharing world just as Twitter is within social media.

As an investor, one must decide if Twitter has a big enough hold in the area of social media to garner an investment. Twitter is to Facebook as Yahoo is to Google. Twitter is a great place to find news and share short messages, but ultimately Facebook has the larger user base and many features used by a variety of people.

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Grant Hosticka has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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