Twitter shares set to dive on Wednesday as market turns sceptical

Updated 1419 BST

For Wall Street, Twitter’s Q2 results on Tuesday night were what would normally have counted as a ‘big beat’ compared to expectations.

But looking at after-hours trading in the stock, when a rise of more than 5% during the main session turned into a fall of about 11%, it seems Twitter’s infamous recent troubles have turned investors more sceptical.

The sell-off overnight underlines our view that Twitter’s stock is highly overvalued, on a purely financial basis.

At the very least, investors appeared to have thought more critically about Twitter’s share price and were not as satisfied with the firm’s relative financial and subscriber growth as they had been in the past.

Read our in-house analysis of Twitter’s valuation here.

Twitter Q2 results summary

• Earnings per share (EPS) – 7 cents vs. 2c in Q2 2014; (4-6c expected)
• GAAP EPS – 21 cents loss per share vs. -24c in Q2 2014; (-27c expected)
• Net loss – $136.7m vs. $144m net loss in Q2 2014
• Revenue – up 61% to $502.4m; ($481m expected)
• 2015 revenue guidance raised to $2.20bn-$2.27bn; (previously $2.17bn-$2.27bn)
• Monthly Active Users (MAU) up 15% to 316 million; (310 million expected)

Twitter’s earnings per share (EPS) excluding certain exceptional items and costs, beat analysts’ average expectation in the second quarter ending in June.

EPS came in at 7 cents compared with The Street view of 6 cents, even though analysts had revised up their earnings forecasts in the days ahead of the release

The average EPS call had edged up to 6 cents in recent days from 4 cents previously.

The revenue outcome was also above the range of consensus forecasts.

Sales were 68% higher, using a constant currency rate, to adjust for the dollar’s strength, and 61% up on a reported basis to $502.4m—$481m was expected.

The net loss was narrower year-on-year.

$136.7m was burnt in the second quarter compared with the minus-$144.6m result in the same quarter a year before.

Elsewhere, Twitter also slightly redeemed itself on guidance.

After having cut its own forecast of annual revenue when it released Q1 results in April to a $2.17bn-$2.27bn range, the social media network lifted the lower end of that range on Tuesday evening to $2.20bn.

Soul searching

During the post-earnings conference call, there was a marked tone of soul searching and contriteness from Twitter’s interim CEO, co-founder Jack Dorsey, especially about sluggish Monthly Active User (MAU) growth, which Dorsey and CFO Anthony Noto, who also spoke, admitted was not satisfactory.

As has been the case in recent quarters, the crucial MAU metric showed less than reassuring progress, with the count at 316 million on average in Q2, 15% higher year-on-year, but stagnating compared to the first quarter against which the rise was just 3%.

It was Twitter’s slowest MAU growth since its stock was floated. This is significant, since MAU’s are the most crucial metric in this space, without decent subscriber growth, one has to wonder where future growth for Twitter will come from.

Still, analysts’ views had been much more pessimistic about user growth, and it was perhaps not too great a hurdle for TWTR to beat them—just 310 million was forecast, according to data gathered by by FactSet.

Twitter “not mass market” yet

Additionally, whilst both Dorsey and Noto struck a more bullish and optimistic tone about recently introduced service offerings and advertising revenue prospects in the later quarters of the year, they accepted they needed to execute fixes more swiftly and that in their view, Twitter had so far not made the jump to what they called “mass market” users.

They also reiterated the company’s damped expectation from Q1 about direct-response ads.

For instance, whilst Twitter boasted that its newly integrated digital monitoring acquisition, Tell Apart, produced $12m in sales in the few weeks since it was consolidated, direct ad initiatives had still not achieved intended goals.

Dorsey said Twitter had been “very successful at monetization with a strong Q2″.

But he added: “product initiatives we’ve mentioned in previous initiatives earnings calls…have not yet had meaningful impact on growing our audience”.

Finally, as per wide expectations, Twitter said it had still not yet found a permanent CEO.

Dorsey said he did “not have an update”, nor was a clear time frame offered during which a new CEO might be hired.

Blue bird to fall on Wednesday

This smattering of negative elements that accompanied Twitter’s better-than-expected earnings brought the stock’s rise of more than 5% on Tuesday to a halt.

It’s worth noting the stock in fact stalled at resistance between c. $36.80 to c. $36.50.

That barrier has held TWTR back for virtually the entire four months since a combination of bad luck and bad earnings slashed Twitter’s market value by almost a third in a just few days during late April-early May.

Combining this chart resistance with the company’s lacklustre Q2 update, suggests the deep sell-off in Twitter shares seen in the specially extended ‘after hours’ market, is likely to follow-through into Wednesday’s main session.

Lows of at least $34.15 that have repeatedly drawn TWTR back for more than a month could be seen, if the better part of Tuesday’s gains are lost.

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