Twitter’s (NYSE:TWTR) stock fell by more than 20% following its Q4 2013 earnings announcement. While the revenue growth was solid, the metrics related to the platform’s usage disappointed investors, which resulted in a large sell off. The total number of monthly active users jumped 30% compared to Q4 2012, but the year-over-year growth was down from the 39% observed in the third quarter.  Additionally, the company added only 9 million monthly active users during Q4, whereas the figure for the last three quarters was in the range of 14 million to 19 million.  Given that the platform has much lower presence across the globe compared to Facebook (NASDAQ:FB), investors were perhaps expecting Twitter to ramp up its user base growth or at least sustain the current rate. But that didn’t happen, which reinforces our bearish stance on the stock.
We are reviewing our price estimate for Twitter in the light of the recent earnings, and will have an update ready soon. Our current price estimate for the company stands at $26, which is a discount of about 50% to the market. Unlike the market price, our estimate is based on a diluted share count of approximately 666 million for Twitter, which includes restricted stock units and outstanding stock options.
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There Are Concerns Around The Growth In Twitter’s Usage
Although it may be too early to conclude, the current subscriber trends do suggest that Twitter may be maturing in the U.S. The company grew its monthly active user base in the U.S. by just 1 million sequentially, and the year-over-year growth stood notably below that for its overall user base. This is likely to make the investors wary of Twitter’s long term prospects as we estimate that the region accounts for more than half of the company’s value. This estimation is based on the expectation that Twitter can garner 116 million domestic monthly active users over the course of next eight to nine years. Going by the current trends, it looks difficult. The chart below shows the company’s quarterly user trends. We notice that 1 million net quarterly additions are the lowest the company had in the U.S. in the last two years.
In addition to the above, the total number of timeline views also declined for the first time in the last eight quarters. While the U.S. business saw a decline of about 5%, the figure for the international business fell by 8%.  This happened despite the growth in the active user base, which suggests that the usage declined on per user basis. That’s not really an encouraging sign and represents a sudden reversal in the growth trajectory. It remains to be seen whether this was a one time decline or the beginning of a trend.
Twitter’s Monetization Is Improving, But Needs To Address Usage Growth
The revenue and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) surpassed our expectations. The full-year revenues stood at $665 million with adjusted EBITDA climbing to $75 million.  This represents year-over-year growth of 110% and 256% in these metrics respectively. There is no doubt that advertisers are finding the platform useful for engaging potential customers, which is evident from the growth in ad revenue per 1,000 timeline views. The figure totaled $1.49 for Q4 2013, up 54% sequentially and 76% year-over-year. 
While Twitter is certainly making progress on the financial front, it will need to take some measures to ensure growth in usage. Facebook has seen exponential growth year after year in the number of page views. In such a scenario, it is disappointing for Twitter to register a decline. The company is working on certain features and initiatives including topic-based discovery, a new ‘discovery’ section and potential role in enabling e-commerce. It is also making the platform’s experience richer by adding media content through Twitter cards. So far, Twitter’s platform has been simple, which suggests that usability and engagement is likely to remain limited to a niche group, unless the company expands its features.Notes: