Philadelphia, Pennsylvania – (StockNewsDesk) – 10/28/2014 — Twitter shares were lower by as much as 15% in heavy trading, following its third-quarter earnings report after hours. The social networking giant actually beats in terms of revenue and earnings; however, it delivered disappointing guidance and missed on key metrics, such as user engagement.
In terms of revenue, Twitter beat Wall Street expectations of $351 million with $361 million, more than doubling sales from the same quarter, last year. However, fourth quarter guidance was underwhelming, as Twitter gave a range between $440 – 450 million. Twitter has been known to “sandbag” guidance, a technique of many tech companies, setting themselves up for an earnings beat. One way to find this out is by looking at Estimize consensus numbers for sales and earnings, which are a better representative of investors’ expectations rather than Wall Street’s consensus.
Earnings came in at a loss of 1 cent per share, which was an improvement from the third quarter in 2013’s loss of 13 cents per share. However, it was a downturn from the surprise profit the company posted in the previous quarter. Twitter seems to have benefited from the unique World Cup experience in the previous quarter, in which users were hooked on the social network as sort of a “second screen” to follow the World Cup. This may have given investors unrealistic expectations for the third quarter.
Drop in Engagement
Analysts noted the primary reason for the brutal selling in the stock after hours was because of the drop in engagement as Twitter is seen losing ground to the number of private messaging services, such as Kik or Whatsapp, that are becoming increasingly popular, displacing public social networks like Twitter. Twitter’s growth continued with a 23% increase, following the 24% increase from last year. Additionally, Twitter’s management team stated there are many people who consume Twitter streams without signing up, but they are still exposed to advertising on their platform.
This is certainly a valid point; however, the chilling part for investors of a high multiple, growth company was the decline in views per user, dropping almost 7%. This may be partly due to the inflated number of the previous quarter due to the high level of public interest with the World Cup. Nevertheless, the reality for richly valued companies is that they must consistently beat across all metrics, otherwise momentum investors will move their capital into companies that are performing.
Stock Price Impact
The steep fall in Twitter’s share price reveals the risks of investing in or trading high multiple stocks, as the slightest stumble can lead to intense selling pressure. Further, there are now trapped longs, sitting on losses, which now are overhead supply. It will take time before new highs are reached in the stock. Comparing Twitter to a stock like Facebook, which is basically at all-time highs, almost the entire shareholder base is sitting on profits. The psychology of the shareholders makes a difference in how the stock trades.
It is entirely possible that Twitter has topped on this earnings report. Its lifetime high was reached in the last week of 2013 at $70 per share. The stock fell more than 50% to a low of $30, undercutting its opening price around $40. The stock staged an impressive rally, highlighted by its second-quarter earnings report, hitting a high around $55. Since then, the stock seemed to be under distribution, outperforming on the downside during market selloffs and underperforming when many tech stocks were making new highs during market rallies in June, September, and October.