Twitter Beats Expectations, but Stock Tumbles on Slowing Growth

Fewer users signing up for social network

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Twitter may finally be figuring out how to make money, but it’s no longer attracting as many new users. That’s giving Wall Street jitters over its high-flying stock and could lead to more changes in how the social network functions in 2014.

In its first ever quarterly earnings report as a public company on Wednesday, Twitter posted revenue of $243 million from October to December, up 116% from last year and well ahead of analyst estimates of $218 million. The social network posted a loss of 2¢ per share, which was in line with estimates. Overall, the company lost $511 million in the quarter, but excluding costs like stock compensation after its IPO in November, Twitter actually earned almost $10 million during the period. 

But that wasn’t enough to stop some investors from jumping ship late on Wednesday. Twitter’s stock plunged more than 17% in after-hours trading. During a conference call, analysts hammered CEO Dick Costolo with questions about the company’s slowing growth rate. Twitter added just 9 million monthly active users in the fourth quarter, the smallest figure since the fourth quarter of 2010. Overall the company’s growth has been slowing consistently for the past several quarters. The number of Twitter timeline views also decreased for the first time in the quarter, dropping from 159 billion to 148 billion.

Costolo tried to assuage concerns by promising that Twitter would continue to quickly roll out new features that can entice new users. “We are doubling down in 2014 to accelerate the growth of our core user base,” he said. “We have a very clear road map across a number of dimensions that we will use to drive interaction and engagement and make it easier for a broader audience to get Twitter, to understand Twitter more quickly.”

The after-hours stock drop slammed the brakes on what has been a stellar performance on Wall Street. Twitter set its IPO price at $26 in November, and its stock soared to almost $45 in its first day on the market. The company’s shares peaked above $73 just after Christmas and have mostly stayed above $60 in 2014. But many analysts have been crowing for months that Twitter is wildly overvalued.

“[Investors] have unbelievably outsized expectation for the firm,” said Rick Summer, an equity analyst at Morningstar. “The company is performing well, but the valuation is really divorced from how the company’s doing.”

Though Twitter has a very active set of users, it has yet to reach the ubiquity or engagement levels of Facebook (which just posted impressive user growth numbers last week). Costolo stressed that the changes the company recently introduced, such as adding photos to users’ timelines and presenting conversations in a way that’s easier to follow, are already producing positive results. This year, he said, Twitter would make it easier for new users to sign up via mobile and easily connect with friends. The company also plans to begin organizing tweets by topic rather than strictly in a chronological format.

Still, it’s not clear exactly what effect further changes will have. Twitter got a massive amount of press and attention during the last quarter thanks to its Wall Street debut, but that didn’t translate into significantly more users. It’s now clear that the IPO honeymoon is over — to keep its lofty stock price, the company will have to prove to investors that it can add users and increase engagement at a faster rate than it has recently.

“They can and they should be looking at expanding their product line and features to draw in more users,” Brian Blau, research director in consumer technologies at Gartner, said in an email. “Twitter will grow over time but it may take them quite a few quarters to get there.”