Twitter Inc (NASDAQ:TWTR) shares fell off a cliff after its fourth quarter earnings report showed that losses were mounting while timeline views, an important advertising metric, fell. Twitter has never turned a profit, so its valuation has always been based on speculation, but the most recent earnings report throws the company’s entire business model into question.
Speculation on Twitter seems misplaced
Twitter isn’t the first company to build a following of bullish investors while posting losses, but loss-making companies should have a reasonable long-term plan for becoming profitable. Tesla, for example, lost money for years while developing its line of electric cars. There was plenty of debate about whether the company would succeed, and there’s still debate about whether the stock is overbought, but business plan (lose money while developing a product, make that money back when we start to sell the product) makes sense.
Twitter’s problem is that the product already exists. The account have been live for years, advertising is available for purchase; we’re not waiting for something to be launched that will start pulling in an entirely new revenue stream. If the losses were declining every quarter we could project profitability after a certain point, but losing $511 million last quarter, compared to $645 million for 2013, is trending the wrong direction. Whatever you think of their stock price, Facebook and LinkedIn are at least profitable.
Operational efficiency, timeline views falling
Twitter Inc (NASDAQ:TWTR) bulls (and the recovering share price shows there are still plenty) argue that Twitter is working hard to improve advertising revenue, but the effort has been counterproductive.
“Twitter’s quest to capture ad revenue drove up operating costs. The company just reported research and development (R&D) cost of $394 million, which was up 170% from a year earlier,” writes Oguz Erkol for SeekingAlpha. The effect has been to drive down operational efficiency every quarter for more than a year. Last year, Twitter spent 90% of its revenue on R&D, compared to 18% at Facebook and 25% at LinkedIn.
Twitter can’t argue that it will become profitable by growing its audience either. The growth in monthly active users has fallen from about 10% a year ago to just 3.8% last quarter. Twitter timeline views, arguably an even more important metric, declined last quarter and has been roughly flat in the US for a year.
It doesn’t matter how exciting Twitter Inc (NASDAQ:TWTR) may be as a company, it still hasn’t given investors a reason to believe it will ever be profitable.
