Investors punish Twitter: Stock down by 25%
Twitter (TWTR) announced its 1Q15 earnings on April 28, spooking investors with lower-than-expected revenue growth. Twitter’s revenue of $436 million this quarter grew at a YoY (year-over-year) rate of 74%, which is 2% below its own midpoint expectations.
Although in absolute terms this growth rate looks impressive, it’s well below the YoY revenue growth that Twitter has achieved in the past few quarters, as the chart below shows. Unhappy investors punished the company for the disappointing results, sending Twitter stock down 25% following the earnings release. What’s more, Twitter was forced to lower its guidance for 2Q15.
LinkedIn (LNKD) announced its earnings on April 30 and also lowered its forecast for the rest of the year. Investors pushed LinkedIn stock down by 20% following its earnings release. Meanwhile, Facebook announced mixed 1Q15 earnings, but despite the company’s slowing revenue growth, Facebook (FB) stock didn’t take the same kind of beating as LNKD and TWTR.
All of this indicates that competition in the online advertising market is increasing. A strong dollar (UUP) is also doing its part to shave off revenue growth at these companies. Google (GOOG) (GOOGL) is the only exception in the online ad industry. It reported better-than-expected earnings despite currency issues.
Twitter blames slower growth on low demand for its direct response ads
Twitter blames its slower revenue growth on low demand from advertisers for its direct response ads. These are the ads that advertisers only pay for if users take specific actions, such as downloading a mobile app or following the advertiser. That said, these are expensive ads.
Twitter says that setting a higher bar for what constitutes a click lowered the click-through rates of its ads. And although this strategic change helped advertisers derive higher return on their investments, it didn’t get converted into higher revenues for Twitter.