Twitter Proves It's No Facebook: What Wall Street's Saying (Update 2)

Updated from 10:07 a.m. to include thoughts from Merill Lynch.

NEW YORK (TheStreet) Twitter (TWTR) shares plunged 19.1% to $53.39 in early Thursday trading, after the micro-blogging social network showed anemic user growth, especially when compared to Facebook (FB).

San Francisco-based Twitter earned 2 cents a share on $242.7 million in revenue during the fourth-quarter, as advertising revenue surged 121% year over year to $220 million. Data licensing rose 80% year over year to $23 million. The company noted that mobile advertising revenue was more than 75% of total advertising revenue.

Analysts surveyed by Thomson Reuters were looking for Twitter to lose 2 cents a share in the fourth quarter, on $217.8 million in sales.

However, the main concern is that the company ended the December quarter with 241 million monthly active users (MAUs), up just 9 million from the prior quarter. Though the company saw 30% year-over-year growth in users, it's clear Wall Street analysts were expecting more. Twitter has just 54 million MAUs in the United States, adding only 1 million users from the prior quarter, indicating it's a mature product domestically.

Comparatively speaking, Facebook ended its quarter with 1.23 billion MAUs, of which 757 million are daily active users (DAUs).

Also troubling was the slowing timeline view growth, with the company noting it reached 148 billion timeline views, a year-over-year increase of 26%.

On the conference call, CEO Dick Costolo noted 2014 would be a year where Twitter would see sharp user growth, reaching "many more users," and that the company was taking many steps to address this. The four initiatives he laid out were a new mobile sign up process, allowing you to see which of your friends are already on Twitter, integration of richer media, making Twitter a better tool for conversation, both public & private, and doing a better job organizing content along topical lines.

TWTR ChartTWTR data by YCharts

The company also gave guidance for the first quarter and fiscal 2014. For the first quarter, it expects revenue in the range of $230 million to $240 million, with Adjusted EBITDA between $10 million and $16 million.

For the full year, Twitter expects revenue between $1.15 billion and $1.2 billion, with adjusted EBITDA between $150 million and $180 million.

Following the quarter, analysts were pretty negative, with some even downgrading shares. Here's what several of them had to say:

BMO Capital Markets analyst Daniel Salmon (Market Perform, $53 PT)

"While revenue and EBITDA performance was stronger-thanexpected this quarter, it does not compensate for slowing MAU trends. Management offered lots of confidence in reaccelerating those figures, but that will likely become a "prove it" story that will make stock outperformance challenging in the meantime. Likewise, recent news out of Facebook suggests that company is taking square aim at some of the features that make Twitter unique. For example, it has launched a Trending feature to highlight popular (and public) conversations, and announced a partnership with Social TV analytics firm SecondSync. We continue to be strong believers in Twitter's unique role with television today (and it also has several interesting search opportunities around news/information and realtime local), but with a negative data point on the trajectory of near-term user growth and new competitive pressures for monetization, we believe continued caution is warranted."

UBS analyst Eric Sheridan (Sell, $42 PT)

"We are lowering our rating to Sell & lowering our PT from $45 to $42 after Twitter presented an initial post-IPO earnings report that demonstrated strong ad trends & margin expansion but negative trends in user growth/engagement. Given the likely forward effort (multiple quarters) to improve user growth & engagement (including product development costs), we see little potential for upside in ests over coming quarters. Even after last night's stock correction, Twitter remains one of the most expensive stocks in our universe - EV/14 Sales of 30x (vs. FB at 13x) & EV/14 EBITDA of 208x (vs. FB at 22x). In addition, since the market close on its public debut, Twitter has outperformed the SPX by 2000+ bps (including last night's selloff) - an outperformance that we believe is unlikely to be sustained given questions raised by the earnings report."

JPMorgan analyst Doug Anmuth (Neutral, $44 PT)

"Twitter reported mixed 4Q results as upside to ad monetization and higher Data Licensing revenue led to better than expected overall revenues and profitability, but user metrics lagged expectations, especially in the U.S., which remains a primary concern. Certain product enhancements such as Threaded Conversations led to choppiness in Timeline Views in the quarter but management expects the longer term trend to continue to increase."

Cantor Fitzgerald analyst Youssef Squali (Sell, $45 PT)

"As expected, Twitter's first quarterly P&L results post IPO were ahead, but not all was great, however, as both MAUs and engagement (two drivers of long-term growth) came in weaker than expected. While management seems confident in its ability to reverse these trends, Twitter has all-of-a-sudden become a show-me story in the same way Facebook was challenged to prove its mobile credentials over a year ago. We now know how Facebook turned out, but we won't know how Twitter will fair for at least several quarters. This uncertainty, combined with extremely high valuation and fast-approaching lock-up expirations (9.9M shares on 2/15/14 and 454.3M on 5/7/14) keep us negative on TWTR, favoring instead FB as THE play on the Social Internet. 4Q's outperformance, particularly in monetization, drives our PT to $45 from $32."

Deutsche Bank analyst Ross Sandler (Buy, $50 PT)

"We have consistently stated that there are two camps formed around the Twitter story: 1) the bears who think the product will stay niche and hence shares are dramatically overvalued, and 2) the bulls who believe that TWTR is one of the best positioned companies in mobile, and on its way to 1B users and a much larger market cap. We remain firmly in the latter camp, but admittedly, did not gain any additional confidence in TWTR fixing its 'user funnel' problem, despite numerous new initiatives in 4Q."

Sterne Agee analyst Arvind Bhatia (Underperform, $43 PT)

"4Q experienced deceleration in user growth and a decline in user engagement (sequentially). We believe shares of TWTR have commanded a significant premium to its high-growth peers due to its higher growth rates. 4Q results are likely to raise questions on how mainstream the Twitter platform can be in the long-term. Until user growth and engagement returns, we think the stock could be for sale, especially given its recent run up. On the other hand, monetization, driven by strong ad engagement, outperformed even the most bullish expectations and proves the platform's effectiveness for marketers."

Bank of America Merill Lynch analyst Justin Post (Underperform, $36 PT)

"Twitter is a quality company, remains well positioned on mobile (lots of monetization growth potential) and executed a better-than-expected 4Q ad revenue monetization ramp. However, our concerns on user growth, flaws in FB per user valuation comparisons, and competition are unchanged. We are maintaining our Underperform rating and our $36 price objective based on higher estimates and lower multiples (now using 55x 2015E EV/EBITDA) to reflect user trends."

--Written by Chris Ciaccia in New York

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