Valuentum may try advertising on Twitter (TWTR) again someday, but probably not anytime soon. Frankly, it’s just too limiting with less than 140 characters to get across a fresh, unique, and interesting concept to readers. In fact, advertising on Twitter may do more harm to a new brand than help it. For products with a relatively steep learning curve, advertising in general is not easy, but the barriers to advertising success on Twitter are monumental for these types of firms. It’s probably not too big of a stretch to assume that if we’re not happy advertising on Twitter, there are millions of other small businesses that aren’t either.
We think this troubling dynamic speaks to Twitter’s performance in the third quarter. Revenue may be growing at a fast pace, but not fast enough, and some advertisers may never come back (despite being recorded as revenue). Even doubling revenue on a year-over-year basis in the period was not enough to generate a profit on a GAAP basis. Twitter’s third-quarter net loss totaled $175 million, or ($0.29) per share. The firm has a long way to go before a GAAP profit becomes a reality. On a non-GAAP basis, net income was a mere $7 million, or a penny per share.
For a company that generated more than $920 million in revenue through the first three quarters of the year to still be unprofitable is quite surprising. Twitter’s revenue is only doubling at this point in its life cycle – it’s not quintupling (5x) or growing at a faster rate. What this tells us is that the firm’s investments aren’t paying off like they once were, and the firm’s long-term earnings potential may not be as large as many believe it is. The company’s market capitalization is north of $29 billion at the time of this writing.
Engagement trends aren’t bad. Average monthly active users (MAUs) were 284 million for the third quarter, up 23% year-over-year. Average mobile MAUs represented ~80% of total MAUs. Timeline views surpassed 181 billion for the third quarter, up 14% year-over-year. Though the internal numbers are solid, Twitter may eventually have to reinvent itself in order to achieve the valuation the market is currently assigning it – and that may mean it could risk alienating early adopters. Twitter’s outlook for the fourth quarter came in below consensus expectations, and shares may continue to face pressure. We’re not interested in the company.