Wall Street Is Really Confused by Twitter

A frenzy followed Twitter’s earnings report on Tuesday, in which it reported that it grew its monthly active users to 271 million, an increase of 24 percent compared with a year earlier, and brought in $312 million in revenue, up 124 percent over the same period. That was good enough to send the stock price up more than 32 percent in after-hours trading.

That sounds like a big deal! But it isn’t really, at least not if you compare today’s figures to Twitter’s previous filing in the spring. For the spring quarter, the company announced it had grown its user base 25 percent and increased revenue 119 percent from a year earlier. Not much different from today’s numbers. Earnings were actually a little worse: Its net loss in the quarter just ended was $144 million—more than it lost in the spring.

So there hasn’t been a fundamental swing in the company’s fortunes. Yet the company’s stock price dropped 30 percent in the days after it reported earnings this spring. Since then and until today, there has been widespread chatter that Twitter had either lost its mojo or would never find it in the first place.

Why such widely divergent reactions to very similar results? The power of expectations. Twitter’s own revenue forecasts said it would make only $270 million to $280 million, which ended up being far too low. “They did fine,” says Brian Wieser of Pivotal Research, the rare analyst whose forecast was overly optimistic. “Obviously well above consensus, but consensus was wrong. As a business, they gained traction, as they always have.”

Even more than revenue, investors have focused on the speed with which Twitter adds new users. The consensus opinion has been that the company was failing at this. Wieser’s optimism came mostly from his inclination to focus more on things like the development of Twitter’s ad business than its user growth. “Most investors continue to be focused on users and user growth, incorrectly in our view,” he wrote in a research note this month. “The likelihood of Twitter becoming universally appealing seems small, but the very large existing user base and the medium’s unique attributes mean there is real revenue to be generated from the core platform.”

Twitter is still in the early stages of its business and people are trying to figure it out. In the last few days, there was widespread speculation that Twitter would develop some new ways to measure the service, so that people would stop focusing on the numbers no one seemed happy with. No new kinds of numbers were coming, and the reactions to the numbers that Twitter did give don’t seem to follow any rational pattern. One thing seems clear about the company: Investors aren’t sure how to think about it.