Don't Get Too Excited About Twitter's Turnaround
There is legitimately good financial news coming from Twitter Inc. for the first time in more than a year. But investors may be overly enthusiastic about the mild signs of progress.
It is worth congratulating Twitter for not shrinking anymore. Revenue in the fourth quarter inched up about 2 percent from a year earlier, the only quarterly sales increase in 2017. And Twitter's forecast for the quarter ending in March suggests that revenue growth is likely to continue. Twitter also pulled off what executives promised in late 2016: its first ever profit under conventional accounting standards.
The dual growth and profit milestones show Twitter's efforts to slash its spending, halt unpromising advertising products and double down on web video has paid off in a business recovery -- albeit one that amounts to crawling halfway out of a deep, dark hole. (Bloomberg L.P., the owner of Gadfly, produces a video news network on Twitter.)
But Twitter isn't out all the way yet. The number of its monthly users was flat from the previous quarter, which shows that just when the company is trending up in advertising sales it is having difficulties luring people to its digital hangout. The company says people using Twitter are doing so more avidly.
But if Twitter's audience doesn't grow, that puts more pressure on Twitter's advertising department to squeeze more revenue from existing users. That's not an easy task for Twitter, which competes for some of the same business that's going to Facebook, Google and Snapchat. Ideally, Twitter wants to increase the number of users, how much time they're spending on Twitter and the ad sales per user. Admittedly, that's a lot of balls in the air at once, and Twitter hasn't been a skillful juggler.
Investors' feelings about Twitter have also turned from bitterness to overly optimistic. Shares have climbed 65 percent in the last six months, and the stock price hit a two-year high last week. Wall Street has been anticipating Twitter's financial recovery, and a return of Twitter takeover rumors likely have lifted shares as well. Pre-market trading Thursday indicates shares may open 23 percent higher.
The anticipation of a Twitter rebound means shares have become overheated. The company's enterprise value now stands about nearly 7 times expected revenue in the next year, according to Bloomberg data. That's the richest valuation for Twitter in at least two years.
It's a positive sign that investors no longer feel morose about Twitter. But it's dangerous that they flipped too quickly from abject pessimism to overly excited.
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Daniel Niemi at email@example.com