Twitter Inc. and Snap Inc., which have both suffered from languishing stock prices thanks to sluggish user growth, bounced back this week after releasing their quarterly results.
Influential social media company Twitter announced a profit for the first time in its 12-year history Thursday, through a combination of cost-cutting and revenue growth of 2 per cent in the final three months of 2017. The company’s shares jumped 30 per cent to US$34.53 during morning trading after the release of the results but closed up only 12 per cent at US$30.18, amid a major sell-off in North American markets.
The previous day, shares of photo and video-sharing platform Snapchat jumped 50 per cent to a high of US$21.14 following the release of the company’s first set of positive results since it went public in March 2017. Snapchat reported adding 8.9 million daily users and fourth-quarter revenue of US$285.7 million, well above analyst expectations. Snap pared some of those gains Thursday, closing at US$19.39.
The stock boosts were a welcome change for both companies, which have struggled to compete with internet giants like Google parent company Alphabet Inc. and Facebook Inc. when it comes to adding users and attracting advertising. But Michael Pachter, an analyst with Wedbush Securities, said he doesn’t think the long-term outlook supports the price increases.
“There’s no shame in revenue growth, but in the context of competitor growth, the increases at Snap and Twitter were truly unimpressive,” Pachter said in an email. “I think there is room for Snap and Twitter to continue growing, but don’t think that the share price moves are justified.”
Pachter noted Snapchat’s and Twitter’s revenue growth was tiny compared to Facebook and Google, which saw revenue growth of US$2.6 billion and US$4.5 billion respectively. And it’s not like Snapchat and Twitter are new, fast-growing upstarts — Pachter noted all four companies are relatively mature.
“Snap is several years from being profitable, so their valuation is tough to justify,” Pachter said. “Twitter is profitable, but only barely so, and a US$20 billion valuation makes sense only if there is a path to more than US$1 billion in profit annually.”
Brian Wieser, senior research analyst at Pivotal Research Group, agreed with this analysis in a note.
“The results represented ongoing progress which was consistent with our longer-term expectations for Twitter as a durable, if niche-y (but highly differentiated), platform for digital advertising,” Wieser said. “However, the stock’s reaction to these results were out of proportion in our view.”
Both Snapchat and Twitter are perceived as difficult for outsiders to understand and participate in. That can be part of the appeal — Snapchat’s younger users don’t want their parents joining and established Twitter users revel in making fun of those who don’t understand the platform’s nuances — but it also limits their attractiveness to advertisers.
Twitter has also suffered a series of public relations problems, with many users complaining the company does not do enough to combat hate speech and harassment. Additionally, a recent New York Times report determined as many as 15 per cent of Twitter profiles could be fake, much higher than the 5 per cent estimated by the company.
In a research note, Mark Mahaney, an analyst at RBC Capital Markets, said Twitter is one of the most influential social networks, but advertisers have a lot of choices. “It is due to this competition and a relatively lower apparent value proposition to advertisers (but again, not users) that we see risk in the stock,” he said.
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