twitter-sharesYesterday was a rough day to be a shareholder of Twitter (NYSE: TWTR). Despite surpassing analyst expectations for revenue growth, a slowdown in user activity saw Twitter shares plunge after earnings.

The Wednesday afternoon earnings report was the company’s first since its Initial Public Offering (IPO). As such, it was the first time that Twitter and the company’s CEO – Dick Costolo – have gone through Wall Street’s earnings gauntlet.

Safe to say, Twitter and Costolo did not emerge unscathed. For starters, the exchange between Costolo and Wall Street analysts on Twitter’s earnings call was, at best, tense.

Analysts had plenty of questions about why user growth and timeline views seem to be plateauing. But Costolo and the Twitter team seemed to be short on answers.

After-hours trading yesterday shaved $6.5 billion from Twitter’s market capitalization.

The Twitter IPO

We first wrote about the Twitter IPO when the company filed the papers required to initiate the IPO process. The company went public in November 2013.

Twitter priced its shares at $26 on the eve of its IPO. When shares finally began trading the next morning, they quickly shot up to $50.09, a gain of 93% over the IPO price of $26. By the end of the day, shares had given back some of the days gains.

But on its first day of trading, shares of Twitter still closed 73% higher than its IPO price, a closing price of $44.90.

Reaction to the Twitter Earnings Report

The market’s reaction to Twitter’s earnings report was swift and vicious.

The company’s balance sheet and revenue surpassed analyst expectations. The real issue with Twitter’s earnings report was growth, and it could be a major issue.

Twitter disclosed yesterday that the number of regular users grew 30%. This seems like a healthy number until you consider that growth in the same quarter of last year was 39%. Even worse, growth should be accelerating rather than slowing in order for Twitter to live up to the market’s hype.

Besides “regular users,” “timeline views” is another important metric used by investors to understand the strength of Twitter’s user base and growth.

The chart below from Business Insider illustrates exactly why investors are – and should be – spooked about Twitter’s growth story, as evidenced by declining “timeline views.”

twitter-chart

The news saw Twitter shares plunge in after-hours trading by 15% after the earnings report was released. The stock fell an additional 2.5% after the earnings conference call.

Twitter Shares: The Bottom Line

If Twitter is unable to continue both adding users and getting users to spend more time on Twitter then the company is in serious trouble.

Until yesterday, the biggest concern has been, “Can Twitter generate enough revenue and start turning a profit?”

After yesterday’s earnings report, many Twitter investors will be faced with the tough reality that the question of revenue growth matters very little if Twitter is unable to maintain its user base.

Without users there is no revenue. And, frankly, without users there is no Twitter.

Until Twitter can document a clear reversal in that trend, I doubt investors will pile into the stock with the same fervor as they have since the November IPO.

Sure, Twitter impressed the market with revenue growth. But with its user base stagnating, it is no wonder we saw Twitter shares plunge after earnings.

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Published by Wyatt Investment Research at