For at least a few years now, Twitter Inc (NYSE:TWTR) has been a social media afterthought in the investor world compared to newer players like Snap Inc (NYSE:SNAP) or more successful, profitable competitors in Facebook Inc (NASDAQ:FB). But the end of last week has seen a sudden change in opinion, as multiple investors have upgraded the stock to a “buy” rating. As you probably already know, this is in response to news reports that the company reported the first net profit in Twitter’s history and beat analyst expectations for revenue, earnings, and EBITDA.
Twitter has done better than I expected and should be lauded for its accomplishments, but there is a difference between applauding a company and giving it your money. And as much as I like using Twitter, Twitter has still not fixed some of the major problems which have held this company back for years. Here are some important reasons to avoid the hype around Twitter.
Profitability Not Growth
Why did Twitter finally record a profit? A look at the official numbers indicates that Twitter’s 4Q 2017 revenue increased by 2 percent compared to the same period in 2016, when it recorded a GAAP net loss of $167 million compared to this quarter’s net profit of $91 million. Twitter thus did not record a profit by increasing revenue, but by slashing expenses. It spent $102 million on stock-based compensation this quarter compared to $138 million in 2016, $134 million on research and development compared to $202 million, and $189 million in sales and marketing compared to $260 million.
Certainly, there is nothing wrong with Twitter taking better care in its expenditures. But Twitter is also experiencing a lack of growth in number of active users as well as revenue, with 330 million monthly active users both in the third and fourth 2017 quarters. In fact, the number of American twitter users declined from 69 million in the third quarter to 68 in the fourth quarter, though that was made up for by a growing number of international users.
Twitter argues that a crackdown on fake bot accounts and a change to Safari’s third-party app integration artificially deflated the active user numbers, but that does not change the overall numbers much. Twitter remains significantly smaller than its social media competitors, which means that it is at a major disadvantage when it comes to accruing advertising dollars.
Some social media companies need to stop focusing on the number of active users and explain how they will procure payment from said users. In Twitter’s case, it needs to explain how it will increase the number of active users after years of stagnation. A single quarter of profitability should not cause investors to forget that problem.
The Troll Problem
If Twitter wants to get more active users, it is going to have to do more to show that it is a friendly place. Ever since the 2016 election, all social media companies have been under intense pressure to crack down on Internet trolls, bots, and foreign provocateurs. No company has been more closely scrutinized than Twitter, and CNBC reported last March that up to 15 percent or 48 million of Twitter’s accounts could be bots.
If those numbers are true, they would be devastating to Twitter’s attempts to increase its number of active daily users. But celebrities and political analysts have dropped off Twitter because they feel plagued by a horde of bots, and the U.S. government is highly interested in seeing what Twitter intends to do about combating these challenges. If users do not feel that they will be safe on Twitter, they will not join. Twitter as well as Facebook face a delicate balancing act in combating trolls, bots, and hateful language while not angering users at the same time.
Furthermore, being plagued by an army of bots will hamper any chances of an acquisition. Investors have speculated about Twitter being acquired by companies such as Microsoft (NASDAQ:MSFT), Tencent (OTC:TCEHY), or Comcast (NASDAQ:CMCSA). But those speculations have lingered around for years and there is no reason to expect anything like that on the horizon. Some investors may in fact be pumping up Twitter’s value hoping for a quick buyout, but they will be disappointed.
Good Prospects, But Not Enough
There is no denying that Twitter is in a better position than it was six months ago, but investors have overreacted to Twitter finally becoming profitable. It is still a social media afterthought, and some expense cutting now cannot compensate over the long term for its lack of user growth and its constant bot and troll problem. As much as I like Twitter, this is a classic case of when it is a good time to sell and reap the benefits of the excitement surrounding Twitter. A single good quarter should not undo the years of suspicion and concern which have surrounded this company.