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Judge Twitter Stock on User, Financial Metrics, Not Offensive Tweets

Will Healy

Twitter (NYSE:TWTR) stock continues to exhibit strange behavior. TWTR sold off on Wednesday after media outlets released two interviews with the company’s CEO, Jack Dorsey.

These stories served as a reminder that, like Facebook (NASDAQ:FB), the microblogging site has generated controversy. However, amid the controversies, the most critical metrics for Twitter revolve around users and revenues. As long as Twitter’s user base continues to generate higher revenues, political controversies should not have a great impact on Twitter stock.

Twitter Was Hit by Controversy Again

So far, the level of controversy faced by Twitter pales in comparison to the scrutiny that Facebook has undergone. However, one interview of Dorsey that was published in Rolling Stone and another that was broadcast on The Bill Simmons Podcast caused Twitter stock to fall by almost 4%.

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Dorsey, who also serves as CEO of online payments company Square (NYSE:SQ), again faced questions regarding harassment on the platform. Many have viewed Twitter’s remedies for the problem as inadequate. Dorsey declined to offer specifics on how Twitter has addressed the issue. He said that there would not be “one single fix,” but indicated that the company needs to improve. Finally, the CEO complained that media outlets only report complaints by victims, while ignoring abusive behaviors that Twitter addresses.

Though this remains an ongoing issue, I see it as, at most, only an indirect threat to Twitter stock. Investors appear to have quickly adopted that view. By Friday, the TWTR stock price had risen to nearly $33, just below Tuesday’s high of $33.35 and above Tuesday’s close of $32.25. Although discussions about Twitter’s controversies can alarm some investors, these interviews did not uncover any new ground.

User, Financial Metrics Remain Paramount for Twitter Stock

The metric that worries me more has had less of an effect on Twitter. The number of monthly active users (MAUs) around the world fell from 335 million in the second quarter of 2018 to 326 million in the third quarter. MAUs in the U.S. decreased from 68 million to 67 million during the same period. Interestingly, Twitter stock did not seem to be affected by this news.

The most important financial metric for TWTR lately has been ad revenue. Twitter’s ad revenue rose 23% in Q2 and 29% in Q3.

One might think that the decline of Twitter’s MAUs would cause its ad revenue growth to decelerate. However, despite the MAU declines, analysts’ profit estimates for TWTR haven’t changed.

We will find out more when Twitter reports its full-year 2018 results on Feb. 7. I think that MAUs remain the most prominent, potential, negative catalyst for Twitter stock. Any additional decline of MAUs will weigh on TWTR stock.

Still, Facebook won’t be able to replicate Twitter’s platform, which is the strategy that FB used to undermine Snap (NYSE:SNAP). As long as TWTR remains the site of choice for entertainers and politicians such as President Trump, the drop in MAUs will prove to be temporary. And with the site generating more revenue per user, higher profits should eventually bolster Twitter stock.

The Bottom Line on Twitter Stock

Amid the controversies surrounding TWTR, revenue growth per user remains the most critical metric for Twitter stock. It only took a reminder of the harassment issue to cause Twitter stock to drop on Wednesday. This issue could continue to affect TWTR stock for awhile. Still, I expect the industry to resolve this issue in time.

In my view, the more concerning issue for Twitter stock is the company’s falling MAUs. If that trend continues, it would negate some of the increases in revenue that the company has begun to generate. However, with Twitter’s ad revenue growing on a massive scale, rising profits should push Twitter stock higher over time.

As a result, the owners of Twitter stock should worry about radical changes in the company’s revenue and user numbers, not tweets by radicals.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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