Twitter’s Stock Hammered Again, Becoming Takeover Target

July 28, 2016 Updated: July 28, 2016    

Like Yahoo and LinkedIn, Twitter could be the next internet company forced into a desperation sale if it cannot find ways to attract users and advertisers to its platform.

Twitter Inc.’s (TWTR:NYSE) stock took another hit after the company announced second-quarter results, showing disappointing user and advertiser growth and a weak outlook. The stock lost more than 60 percent since its initial public offering in 2013, making it more attractive for potential buyers.

Results announced on July 26 provided another sobering snapshot of Twitter stuck on a treadmill, as other platforms like Facebook and Snapchat are racing ahead in the battle for user growth and loyalty.

Twitter's revenue growth has decelerated from approx. 100 percent to 20 percent in the last 11 quarters. (YCharts)
Twitter’s revenue growth has decelerated from approx. 100 percent to 20 percent in the last 11 quarters. (YCharts)

The 10-year-old messaging platform slightly missed estimates on revenue, growing only 20 percent year-on-year in the second quarter compared to 36 percent growth in the first quarter.

We’re focused right now on what matters most, and what we need to fix.
— Jack Dorsey, CEO, Twitter

Twitter added just 3 million users in the past three months. Its monthly active users averaged 313 million while Instagram recently passed the 500 million user mark. Facebook leaves Twitter in the dust with 1.7 billion monthly users.

But finding new users isn’t Twitter’s only problem.

The company is losing its appeal to advertisers as well, likely because people aren’t spending as much time reading and posting tweets. Advertising revenue, which is the company’s most important revenue segment deteriorated significantly. The management’s third-quarter guidance suggests that recent challenges are likely to remain.

User growth (Statista)
User growth (Statista)

To make matters worse, Twitter still hasn’t managed to record a profit in its history. The company lost $107 million in the last quarter.

The company paid $168 million in the second quarter in stock-based compensation to attract and retain employees—the main reason for the financial loss. The good news is that stock-based compensation as a percentage of revenue declined from 35 percent to 28 percent when compared with the second quarter of last year.

An Acquisition Candidate

A slowdown in user growth convinced professional networking service LinkedIn to agree to a $26.2 billion sale to Microsoft on June 13.

Since then Twitter shares climbed by 34 percent from its all-time low of $13.7, leading into the second-quarter earnings report. However, the shares reversed course after results dissappointed. 

We continue to see significant value in Twitter’s user base, content, and interaction data despite the company’s difficulty in realizing that value.
—  Goldman Sachs

In a conference call to discuss the quarterly results, co-founder and CEO Jack Dorsey said he believes Twitter is building a “company and business of importance” when asked about a potential sale of the company.

“We’re focused right now on what matters most, and what we need to fix. And we’re seeing really healthy signs that are pointing us in the right direction in terms of what we need to continue to do,” he said.

Goldman Sachs believes Twitter has multiple avenues for new revenue as well as the potential to be acquired by another company, which make the company attractive for investors.

The share price of Twitter Inc. is off more than 60 percent since its initial public offering in 2013. (YCharts)
The share price of Twitter Inc. is off more than 60 percent since its initial public offering in 2013. (YCharts)

“We continue to see significant value in Twitter’s user base, content, and interaction data despite the company’s difficulty in realizing that value,” stated Goldman Sachs analysts in a report.

“While the positive engagement trends didn’t translate into incremental user growth this quarter, with incremental video content, major events, and a seasonal tailwind, we believe 3Q could potentially deliver on that front,” says Goldman.

Twitter is pinning its hope for future growth largely on live video of sports and other events. In its biggest deal so far, Twitter will begin streaming the National Football League’s Thursday night game.

But the NFL deal or next month’s Summer Olympics evidently won’t help Twitter much in the current quarter, which ends in September. Twitter projected about $600 million in revenue during the period, which was well below the $682 million anticipated by analysts surveyed by FactSet.

“The revenue issues of Twitter appear to be company specific rather than a reflection of the macro/ad market,” investment bank Citigroup stated in a report.

“Management remains optimistic that consumer and advertiser product initiatives recently launched or in the pipeline will improve user growth, user engagement, and monetization, though the timing and impact remain uncertain in our view.”

The Associated Press contributed to this report.