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Twitter is Finally Profitable… But We Aren’t Buying It

by Feb 12, 2018

On February 8, Twitter announced the first profitable quarter in the company’s history. The first-ever Twitter profits were announced exactly 1,554 days since its IPO back in November 2013.

The company announced it made $91 million in profit during the fourth quarter of 2017—making it the first profitable quarter in the company’s history. For a quick comparison, in Q4 2016, Twitter lost $167 million.

Things are certainly looking up for the company. Total revenue was $732 million, beating projections by 6.7%. Its stock price increased by 21.7% on February 8 and is currently trading at $31.51—its highest value since October 2015.

Company CEO Jack Dorsey attributed the success to the company’s continued ability to connect advertisers to customers: “Twitter continues to help our partners be relevant in the moment at scale.”

Twitter profits are finally materializing, but is the company really a smart long-term bet? There are numerous reasons to be skeptical.

For starters, Dorsey’s comment is a little misleading. Twitter received more ad revenue than expected last year, but still doesn’t come close to competing with Facebook and YouTube. Even Instagram accounts for a much larger share of total digital ad spending.

Second, while the company is finally profitable, revenue is pretty stagnant. In fact, 2017 revenue was only 2% higher than it was in 2016. The profitability owes to reduced overhead, not more users. The company shed 9% of its workforce in late 2016 and sold off a number of its less-profitable operations.

In fact, the company’s customer base looks to have stagnated. Total monthly users are currently at 330 million worldwide, up only 4% from one year ago and with zero net growth since Q3 2017.

Perhaps the worst news of all, Twitter’s US user base actually shrunk in the last quarter, falling from 69 million to 68 million—US users are the most valuable, typically accounting for more than half of the company’s total advertising revenue.

With a tapped-out US user base, the company will have to expand in other markets in order to stay profitable. That’s not an exciting business model, especially given that some major emerging markets—most notably China—have banned use of Twitter altogether.

Can Twitter Profits Continue with Stagnant Revenues?

The jump in Twitter’s stock price is an indicator that investors are giving the company another chance. However, it’s tough for any company to stay profitable purely by paring down overhead. At some point, the cash needs to come flying in.

The company is banking on an increase in daily users—a core demographic that presents the most value to advertisers. According to Dorsey, the number of daily users increased by about 12% year-on-year during the last quarter. In his view, that positive change came because the company decided to double its character count to 280 last November, which attracted more users to its platform.

While that sounds nice, it’s not convincing. Twitter can’t compete with Facebook and YouTube in the advertising sector. The US market appears to be saturated, even if more people are now using Twitter on a daily basis. It’s banned outright in China, the most attractive market outside the US.

What’s there to like about this stock? Not much. Twitter profits are unlikely to last as long as the company remains on weak footing revenue-wise.

Some investors might make a pretty penny betting on Twitter’s rise, but we aren’t buying it.