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Twitter's Plunge in Context

NEW YORK (TheStreet) - My biggest takeaway from Twitter's (TWTR - Get Report) dud of an earnings report is that the company's growing pains, so far, have been relatively painless when contrasted to Facebook (FB - Get Report).

Shares in the company, after all, have only plunged to lows seen about two months ago in mid-December. Put another way, shares are double the price of the company's initial public offering just three months ago.

So now seems like a good time to add a bit of context to Twitter's first quarterly earnings report and its wild-ride in public stock markets.

That no long-term shareholders in Twitter since its IPO have lost money in the company seems to me like a minor miracle. In some sense, Twitter's relatively small-sized initial public offering now appears to have been a smart and cautious move by the company, which deserves a bit of praise.

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If Twitter's closest comparable is Facebook, then the company is also in the midst of a scandal-free first year on public stock markets that could augur well for investors over the long-term.

Facebook's Sixteen Candles

For those who can't remember past last year, Facebook spent its first sixteen months on the Nasdaq toiling below its IPO offering price of $38 a share, after initial earnings reports cast doubt on the company's ability to engage users on mobile devices and monetize that traffic. Because Facebook had conducted a $16 billion IPO at a valuation of about $100 billion, there were many, many angry investors.

In the wake of weak initial earnings and a drum of criticism from the business press, Facebook CEO Mark Zuckerberg vowed to prioritize mobile user engagement and the company's efforts to generate advertising revenue off of mobile devices. Acquisitions such as the company's deal for Instagram proved helpful in Zuckerberg's efforts, which he conceded hadn't been a priority of the company prior to its IPO, though it's unclear how much revenue Instagram is currently generating.

Recent quarterly earnings reports have shown Facebook and Zuckerberg are increasingly adept at driving the company's 1.23 billion users onto mobile devices and generating earnings from that activity.

Mobile daily active users reached over 556 million at the end of 2013, a near 50% year-over-year increase. Advertising revenue from mobile devices represented over 50% of Facebook's overall ad revenue, up from 23% in the fourth quarter of 2012.

Shareholders have rewarded Facebook for its success in transitioning to mobility. The company's stock finally eclipsed its $38 a share IPO price in August 2013. Since then, shares have risen over 60% to $63 a share, putting Facebook's stock market capitalization at over $160 billion.

Airwaves are no longer dominated by angry Facebook shareholders. In fact, given Facebook's share price recovery, Morgan Stanley's (MS) CEO James Gorman recently did a bit of a victory lap on Bloomberg TV. That's after the firm was excoriated by the press sand investors for its underwriting efforts and sued by some state regulators.

What Twitter Crash?

Within that lens, Twitter's post-IPO run on the New York Stock Exchange has been a far smoother ride than Facebook, even if the company's shares plunged over 20% in the wake of its quarterly earnings report. The stock drop may even prove a relief for investors who had bid up the company's market capitalization to over $30 billion.

Twitter and its CEO Dick Costolo - like Mark Zuckerberg and Facebook prior- have something to now prove to a more skeptical investor community. That may be a healthy development for the company and its shareholders, raising the prospect that Twitter uses 2014 to refine its business model.

So what does Twitter have to prove? So far, however, the company's reach indicates it is more of a media company and a tool that is avidly used by consumers of news and information than a burgeoning technological powerhouse in the mold of Google (GOOG) and Facebook.

To some extent, the company benefited from what CEO Costolo said was "viral growth" as media consumers began to appreciate how Twitter had revolutionized the distribution of news, information and commentary. In the U.S., however, Twitter's adoption curve is slowing as the company finds a smaller and smaller of potential new users.

On a call with analysts, Costolo vowed to invest heavily in 2014 to alter Twitter's adoption curves as it comes against a maturing base of users. Costolo indicated enhancing Twitter's messaging capabilities could be one area of focus this year. Leveraging relationships with advertisers and businesses also appears to be another focus.

Twitter's numbers also are worrisome in the context of Facebook, which boasts a far greater base of users and a platform that appeals to people who just want to post a photo of their dog or baby, or send someone a birthday message. It also appeals to more advertisers.

Costolo will now need to prove that Twitter can go mainstream like Facebook. The alternative, is that Twitter fashions itself as a different type of company than Facebook. As events like the Grammy's, Superbowl and The Olympics show, Twitter may be a better platform than Facebook for TV advertisers.

San Francisco-based Twitter will also need to prove its technological edge, something that is the ballast of Google and is increasingly more apparent at Facebook. The company acquired MoPub, which may help Twitter's ad buyers find the market they want. Twitter also has an opportunity in data licensing that may help the company diversify from the volatile online advertising market.

"We believe user growth as reported is highly troubling given what we believe is near universal consumer awareness of Twitter and unmatched levels of promotional support from mainstream media and personalities," Wells Fargo analysts said.

"In short, we believe millions of consumers have sampled Twitter only to find a complex product with marginal relevance and value-a view that we realize stands in sharp contrast to the fanatical loyalty the company enjoys among its core users," they added.

That's what stands in the way of Twitter becoming the next ubiquitous global internet utility, according to those analysts.

As with Facebook, Twitter and may find such challenges a helpful development for the company. For CEO Costolo, who isn't a Twitter founder, it may also give further insight into how he envisions the company growing.

In the interim, Twitter appears to have set an easy guidance to beat in the first quarter of 2014 and through the year. 

Twitter's growing pains, so far, have been relatively painless and that might be the important piece of context investors need as the company enters a year of growing pain.

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