6 Mar

Twitter: Why Cost-Cutting Is Particularly Complicated

WRITTEN BY Neha Gupta

Stock performance has been underwhelmed

Twitter stock (TWTR) has recorded underwhelming performance in recent quarters. As of February 28, the stock was down more than 11% compared to where it was 12 months ago. In contrast, Facebook (FB) stock was up more than 27% compared to 12 months ago.

Twitter: Why Cost-Cutting Is Particularly Complicated

The chart above shows Twitter’s US monthly active subscribers.

Feeble growth metrics

Twitter’s weak stock performance is related to its feeble revenue and subscriber growth metrics compared to rivals such as Facebook. The company reported subscriber growth of 4.6% in 4Q16 while revenue only rose 1%. Furthermore, the average revenue the company extracts from each of its users fell last quarter. Twitter reported US (SPY) average revenue per user (or ARPU) of $5.70, down from $6.31 a year earlier. Yet Facebook’s US and Canada ARPU expanded to $19.28 from $13.06.

Cost-pruning may not move the needle for Twitter

If Twitter can’t grow its top-line rapidly, can it bet on cost-cutting to turn its fortunes around? While company managers have always turned to cost-cutting when it’s tough to grow revenue, for Twitter, the picture looks complicated. The company has had top-line growth problems for a long time, and investors may not be fully sold on the idea that cost-pruning could help the company turn around.

Moreover, aggressive cost-cutting could limit Twitter’s ability to innovate, yet it needs new products and features to boost user engagement on its platform to fend off competition from Facebook, Alphabet’s (GOOGL) Google, Microsoft (MSFT), Yelp (YELP), and Snap (SNAP).

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