Since Twitter became a public company, many investors have wandered the stock based on the strength of the social network’s user growth each quarter.
On Thursday, Twitter reported having 288 million monthly active users, compared to estimates for upward of 295 million. That represented a gain of just 4 million active users during the holiday quarter, or about 1.4% growth quarter-over-quarter.
The good news is, Wall Street reacted by sending Twitter’s stock up more than 10% after hours. It effectively gave Twitter a pass on its sluggish user growth for two reasons. First, Twitter crushed analyst estimates for revenue and earnings in the fourth quarter, with revenue more than doubling year-over-year to $479 million, showing that the company’s monetisation engine is very strong.
This is definitely Twitter’s first billion-dollar revenue year.
The impressive financial numbers alone probably wouldn’t have been enough to shift investor focus away from user growth, which brings us to the second factor. In the earnings release and on the call that followed, Twitter executives assured investors that user growth would be higher in the current quarter.
“I want to highlight that the user numbers we saw in January of this year indicate that our MAU trend has already turned around and our Q1 trend is likely to be back in the range of absolute net adds that we saw during the first three quarters of 2014,” Dick Costolo, Twitter’s CEO, said on the call. “Monetisation was strong and user adds were generally fine, but most importantly management commented that 1Q net adds should return to historical levels of 13-16 million.”
Arvind Bhatia, an analyst with Sterne Agee, called Twiter’s user growth for the holiday quarter “unimpressive,” but added that “management indicated MAU trends have rebounded in January.” Bhatia also noted the unexpected explanation from Twitter that a “bug” with iOS 8 somehow cost the social network four million users during the quarter — more or less the difference between it hitting and missing user targets.
All of that was enough to give Twitter a pass for this quarter, but it now must live up to the greater user growth expectations that it has set for the coming quarter. Because no matter how much Twitter may be trying to shift the narrative to its broader logged-out user base and new revenue-generation efforts, Wall Street is still not turning its attention away from that monthly active user number.
“Beyond the very positive business story, the user growth story – or, more specifically, absence of meaningful user growth, with a reported gain of only 4 million this past quarter – will probably continue to concern some investors,” stated Brian Wieser, a senior research analyst at Pivotal Research Group. “Many will continue to focus on related metrics as a key one against which to hold management accountable.”