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Twitter Meets Earnings Expectations but the Shares Get Punished

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Shares in Twitter traded down almost 20% on Friday after the company reported quarterly earnings that were in line with projections and beat the consensus estimate for revenues.


Investors focused instead on an unexpected decline in monthly average users at the social-media giant.


Prior to the report, Twitter had rallied 78% in 2018 and in what is becoming a recurring theme during this earnings season, the market appears to have expected perfection and was quick to punish the shares on even a slight suggestion that growth may be slowing.


Net earnings of $0.17/share exactly matched the Zacks Consensus Estimate and represent growth of 112% over the same quarter in 2017. Revenues of $711 billion exceeded the consensus of $700B.


In a predominantly upbeat letter to investors, Twitter highlighted growth in daily average users of 11% year-over-year but a slight decline of monthly average users from 336 million in Q1 to 335 million in Q2.


Even though Twitter has reported 15 straight quarters of results at or above analyst expectations, it’s fairly high trailing P/E ratio of 81X left precious little margin for error.


The decline was not totally unexpected and is largely the result of a company initiative intended to purge “fake” accounts.


Though the deletion of accounts that are suspected of sharing misleading or inappropriate content was expected to reduce follower counts by up to 6%, it’s reasonable to expect that Twitter’s ability to monetize advertising views should be largely unaffected.


Just as we saw with Facebook and Netflix (NFLX - Free Report) , it seems that investors in popular tech stocks have their finger on the “sell” button at the first sign of any slowdown in growth. Twitter’s actions to strengthen its platform and user base could easily be seen as a positive factor in the company’s long-term prospects, but instead a tiny miss in one single metric sent the shares down 20%.


The investor letter details at length the exact criteria Twitter uses to decide about accounts to delete and the specific effect those actions can be expected to have on DAU and MAU. Twitter literally couldn’t be more transparent about what they’re doing and why.


Other than the single number than riled the markets, Twitter is poised to continue growing users, revenues and profits and management is unafraid to make temporarily painful decisions in order to ensure the long term health of the company.


It’s easy to see today’s selloff as an outstanding opportunity to initiate or add to a position in a company that promises to be a social-media powerhouse for years to come.
 

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