Twitter gets stung by an errant tweet but investors shouldn't write the company off

Twitter’s share price took an US$8 billion tumble after their results were leaked early, prior to market closure – ironically through a tweet. The social networking site posted results showing revenue had risen 74% to US$436m but it missed analysts’ expectations of US$456.2m. It has now lowered its 2015 full-year expectations.

The tweet that broke the news of Twitter’s results.Twitter

But other financial indicators of Twitter’s performance are more positive and a closer look at the company’s business model shows investors should not be so spooked. Twitter’s adjusted income of earnings before interest, taxes, depreciation, and amortisation (EBITDA), for example, increased to US$104m, above the previous forecast range of US$89m to US$94m. And the company is employing a strategy that has a mix of building on its core offering, while keeping their service fresh through new innovations.

Keeping users and investors happy

On one level, Twitter’s business model is working. The social media platform is attracting more users than ever before. The number of monthly active users is up and breaking the 300m barrier for the first time. It also informs a large number of media reports. So there is room for optimism, in spite of its latest disappointing revenue figures.

But the company must convince advertisers and investors that its business model can deliver long-term value for them. This is done through a mix of keeping the active number of users high and finding ways to monetise its offering.

To do so, Twitter has a strategy that is in the right direction: strengthening its core offering, reducing barriers to consumption and delivering new apps and services. Advances across these three areas have helped Twitter deliver growth in its revenues and user-base: mobile, international, and ad engagements.

Twitter’s recent share price plummet.Google

Staying relevant

Twitter is well-positioned to make the most of the growth in mobile users, as they have traditionally focused on the mobile experience. Overall, the number of monthly active users on Twitter has actually risen 18% year-on-year to 302m, compared to 288m in the previous quarter. Mobile users account for approximately 80% of these total monthly active users and international users (non-US) make up around 78% of these. From the 14m new users compared to the previous quarter, 11m were international.

Twitter has brought in a wave of new features as it looks to keep its offering relevant. These include “instant timeline” to speed up the sign-up process for new users, homepages that are accessible for logged-out users, private messaging and video sharing. These have helped Twitter freshen up the overall experience they deliver – and be relevant, particularly in new markets.

Video features highly in their efforts. It reflects the growing popularity of video sharing on rival social media platforms. And the launch of Periscope, its new live-streaming video app, is part of this. Twitter’s CEO, Dick Costolo, said it allows users to transport into interesting people’s lives and that it nicely fits with Twitter’s strategy: to give users the power to create and share ideas instantly, and without barriers.

Capitalising on their innovations

Advertisers are now learning how best to use Twitter’s toolkit more effectively to attract relevant audiences. And this is an area where Twitter has scope for further growth, as the number of advertisers they have on their books (60,000) is much lower than that of Facebook (2m) and Google (8m). Another key question is how appealing is Twitter to advertisers – in other words, not only having more advertisers involved but have them spend increasingly more compared to other social media platforms.

By making its partnerships with other platforms work, Twitter has potential to increase its value to advertisers. The company has entered recent partnerships with Flipboard, Yahoo! Japan, and Google – the latest meaning tweets will be integrated in Google search results. The more tweets come up in results across search platforms, the more Twitter’s relevance will increase, both for users and advertisers.

The partnership with Google could allow both firms to explore a potential takeover deal. And as Twitter’s business model keeps producing new, engaged users, and new innovations, the more it will be attractive to other firms.

New services, acquisitions and partnerships can take time to deliver results. And while they might keep users happy, the question is: are investors willing to give Twitter the time? The latest stock performance might suggest otherwise, but the company’s strategy is one worth investing in.

Meanwhile, Twitter’s management will be under pressure to deliver better results in the next two quarters and possibly consider takeover scenarios. Otherwise investors may start calling – or even tweeting – for a change at the top.

Sotirios Paroutis does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.