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Typically, a company’s quarterly earnings report is a good time for investors to get some insight about its long-term prospects. But while Twitter (NYSE: TWTR) provided many enticing numbers in its second-quarter report on Tuesday – including strong sales growth, a narrower net loss and increased guidance for the full year – would-be investors are going to have to dig a little deeper.
That’s because it’s possible to make a credible argument in favor or against Twitter as a long-term investment.
Yes, Twitter continues to enjoy strong growth (revenues in the latest quarter rose 61% to $502.3 million, easily surpassing the consensus forecast of $481.2 million). Yes, even as all sorts of new social media sites crop up, Twitter is still the undisputed leader in the sector it invented. Yes, it offers a critical tool for communications of every variety, from casual socializing to sharing news from the White House.
On the other hand, Twitter’s growth of new users has been slowing for some time – it added “only” 8 million in the latest quarter. And management has spoken candidly about the need to make changes in order to reach its full potential.
Twitter is still not making money, and while tech companies are legend for putting off earnings while they reinvest in the business, Twitter’s lack of profitability is more simple: It’s still trying to find the most effective way to monetize all that traffic.
What Are Members Worth?
And, speaking of traffic, this gets to the crux of the debate of whether Twitter is right for your portfolio. It essentially comes down to this: How much you believe the company’s 314 million members are worth. If Twitter were a country, it would be considerably smaller than Facebook (NASDAQ: FB), but still pretty darn large. Co-founder Jack Dorsey has called Twitter “the world’s biggest microphone.”
If Twitter were a typical company selling widgets or cars, it would be possible to get some sense of its worth based on its volume of business. But Twitter operates in the far more amorphous realm of 140-character “tweets.” They’re enormously powerful communications tools, but their actual value is anyone’s guess.
Currently, the market says that Twitter stock is worth a little less than $25 billion. That’s about the same as old media titan CBS Corp. (NYSE: CBS), which earned $2.9 billion last year on revenues of more than $13 billion. This sort of comparison is interesting but ultimately not that useful in measuring Twitter’s value since there is a lot of expectation for future growth built into Twitter’s price.
Earnings Takeaway
One thing we can take away from the latest earnings report is that Twitter hasn’t figured it out yet and it can’t sustain its early growth rates forever. Investors will need to show some patience.
My take? I think the world’s biggest microphone is an incredibly valuable property. I would bet on Twitter figuring out its challenges and finding a way to monetize its traffic. But that’s an educated guess and nothing more. Individual investors need to decide for themselves whether they’re comfortable with this level of uncertainty.
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