Twitter's honeymoon cut short by worries over limited scale

Twitter's honeymoon period as a public company, ended with a bang as its shares fell almost one-fifth after releasing its first earnings announcement.

Investors got the jitters when they saw that the home of the 140-character tweet grew its monthly active users quarter-on-quarter at the same rate as Facebook, in spite of the latter being almost five times as large.

Anxious analysts quizzed Dick Costolo, chief executive, and Mike Gupta, chief financial officer, about whether growth could ever again accelerate in the US, and if flighty users were trying the platform and then leaving.

The worries that Twitter is a niche product, adored by existing users but with no chance of widespread adoption, lurked in the background along the road to an initial public offering last November.

Twitter has "massive global awareness", as Mr Costolo said on Wednesday, but that has not translated into people signing up. Its challenge is to tempt new users to try a site that they know exists but, until now, have not thought is for them.

This gap between brand and reality seems to have been ignored by an excitable market. Shares had soared more than 150 per cent in the three months since the IPO - rising even when analysts began to warn the valuation was unwarranted.

Brian Blau, an analyst at Gartner Research, said investors had forgotten that Twitter's subdued user growth, up just 4 per cent quarter-on-quarter to 241m, had been talked about before.

"Expectations were a little bit higher as it is often compared with Facebook and other large companies, which they are clearly not," he said.

Mr Blau said that Twitter had invented a new category of communications that will take the mass market longer to grasp, whereas Facebook was merely a better version of MySpace. He also that said the company's early teething problems - with several management changes as a start-up - may have set it back.

Mr Costolo had previously said that he thinks Twitter can lure 1bn users, but that it needs to be made easier to use and understand.

On the earnings call, he said a combination of changes throughout 2014 should boost user growth by, for example, making the process of joining and following people simpler, topics of interest easier to find and cutting down on Twitter jargon.

He also said they would develop the service's private messaging function, a move aimed at capturing a market created by chat apps from Whats App to Snapchat and now targeted by Facebook and Instagram.

Mr Blau said these cumulative tweaks might take longer than the market was expecting. "Hopefully expectations have been reset," he said.

Brian Wieser, an analyst at Pivotal Research who was the first to downgrade Twitter to a "sell" because of its soaring valuation, said the first earnings statement had been an "education" to investors.

"Twitter has little chance of being a widely used platform and that was always the case," he said. "To have presumed otherwise is to have never used it."

Mr Wieser found much to like in Twitter's earnings statements, and said it did not have to dramatically grow its user base to increase revenues. He focused instead on its efforts to grow turnover.

Revenue, which hit $665m in 2013, was higher than the average analyst estimate, and its sales forecast for $1.2bn in 2014 was better than the consensus. The non-gaap loss per share was slightly less than expected at 19 cents.

Mr Wieser said the performance of MoPub, the mobile advertising exchange that Twitter bought last year, was "really strong" - a good sign for Twitter's plan to use its data to serve adverts on other sites.

For Mr Wieser, and perhaps for Twitter, wiping $6bn off the company's hefty market capitalisation in a couple of hours was a much-needed setting of ground rules. Throughout the IPO process, Twitter had attempted to keep a cap on expectations.

"It is a good thing that the stock comes back down to earth. It is a good company but if the stock stayed so elevated it would have had real problems," he said.

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