Twitter sees no “Trump effect”, stashes more cash

<p>Twitter shares are set slide further on Friday, with traders continuing to pressure the stock lower after it opened down 10%.</p>

Twitter shares are set to slide further on Friday, with traders continuing to pressure the stock lower after it opened down 10%.

The social media group reported its slowest ever quarterly revenue growth, and that’s eclipsing what would be—for a less volatile stock and company—a fair operational showing in the fourth quarter.

Excluding a typically heavy layer of exceptional items, the group beat Wall St consensus for earnings per share (EPS) at 12c by making 16c. Revenue also grew year-on-year, albeit not as much as investors wanted, rising 1% to $717m.

After a string of frustrating quarters in terms of audience trends, active user metrics also firmed up in the quarter with a solid rise of 11% in daily active users (DAUs) as MAUs ground 4% higher.

User growth though, is inseparable from revenue growth, particularly in advertising sales, and investors are homing in on an even tougher environment that’s looming for Twitter as the Internet ad market gets more crowded.

The planned flotation of Snapchat’s owner SNAP, perhaps as soon as March, is concentrating investor minds on the fact that the temporary message social app is growing MAUs at a far faster pace than Twitter. With more than 300 million MAUs at the end of 2016, Snapchat is likely to surpass Twitter’s 319 million well within two years.

Twitter itself warned on Thursday about “escalating competition for digital ad spending and Twitter’s re-evaluation of its revenue product feature portfolio, which could result in the de-emphasis of certain product features”. Meaning certain categories of the group’s advertising offer might have to be abandoned, due to poor economics in the face of competition.

It should be evident, therefore, that the hoped-for “Trump effect” was a sideshow. It’s no mean feat to have the President of the United States as a major user (though the jury’s out about reputational impact). However a long line of celebrity users preceded Donald Trump with little discernible benefit for revenues. Ad rev was flat in Q4 at $638m, completing a deceleration from +72% in Q1 2015, +48% in Q4 that year and up just 6% by Q3 2016. It was almost inevitable that first quarter guidance would be light of expectations.

For us, the group’s recent performance just adds to our longstanding scepticism about the rate of innovation at the group, effectiveness of execution, and of course, expenses management. Our biggest continuing query remains Twitter’s ability to establish a credible record of cash flow growth. A thorough test of likely cash flow scenarios a couple of years ago showed Twitter was not on a sustainable path of cash flow generation, given poor underlying profitability.

In our view, given a persisting slowdown in revenue growth and, till this quarter, near static user growth, evidence of consistent operational improvement is still not present.

It’s important to note however that free cash flow has now been positive at year end for two consecutive years, standing at $544m by Q4′s end, against just $35.8m at the end of 2015.

The net loss has, however, widened to $167.1m in Q4 from $90.24m.

Given continued revenue deterioration in Q4, we expect takeover speculation to remain the key driver of the stock’s ephemeral upside for the foreseeable future. The length of that future as a standalone company might just have been extended though, even if meaningful growth prospects remain absent.

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