3 Reasons Twitter Stock Could Fall

By Markets Fool.com

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Source: Twitter.

Shares of Twitter flew higher after it reported its fourth-quarter earnings earlier this month. The company beat analysts' expectations on both the top and bottom lines, and investors rewarded it with a 16% pop in the stock price.

While I believe shares can still move higher from here, there are a few things that could negatively impact the company's stock in the future. With its price floating around 130 times earnings expectations and 13 times revenue projections, any disappointing reports could cause problems for Twitter investors. Due to the high multiples, a number that comes in below expectations could cause a significant downward move in the stock.

Here are three of the biggest challenges Twitter faces in 2015.

Slower user growth
One of the biggest issues for Twitter over the past year has been its slowing user growth. That was especially prominent in the fourth quarter, when the company added just 4 million net active users, resulting in just a 20% year-over-year increase.

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Going forward, the company expects first-quarter net adds to total similar amounts to the first three quarters of 2014 -- 13 million to 16 million. Even at those levels, Twitter will continue to experience a slowdown in new user growth on a relative basis. Adding 16 million net new users in the first quarter would result in a year-over-year increase of just 19%.

CEO Dick Costolo previously said that Twitter could reach 400 million active users by the end of 2013. In reality, Twitter's growth has failed to accelerate, sitting mostly in the range of 13 million to 19 million new users per quarter since 2012. Twitter now has 288 million monthly active users. That's not terrible --Facebook exhibits a similar trend (albeit at a larger scale). However, a continuation of that trend would mean user growth would continue to diminish.

As long as Twitter hits its marks as indicated, the company and stock should be fine. If it misses, and grows more slowly (on an absolute basis) than last year, it will hamper its ability to reach its revenue and EBITDA guidance.

Lower engagement
Twitter will stop reporting its primary engagement metric -- timeline views per user -- in 2015. While timeline views per user increased 3% in the fourth quarter, Twitter had experienced a decline in average engagement in each of the previous four quarters. Average engagement last quarter was still lower than where it was in the fourth quarter of 2012, both in the U.S. and overall.

Twitter will face tough comparable quarters in the first half of the year. Last year, it benefited from the Olympics and the FIFA World Cup in the first and second quarters, respectively. Twitter is looking to improve engagement with more curated timelines, and has big plans to make its curated timeline for the Cricket World Cup available to anyone -- even logged-out visitors.

Twitter's moves to attract more logged-out visitors could also negatively impact its engagement levels. It recently agreed to a deal to license its data to Google to insert links to relevant tweets in its search results pages. Those links will take users directly to that tweet's page, bypassing the timeline. Fellow Fool Leo Sun believes this could have a negative impact on total timeline views and ad revenue.

Twitter is also rolling out features that will negatively impact engagement such as its "While You Were Away" feature, which shows users some of the most important tweets that occurred since their last log-in, reducing the need to scroll through dozens of tweets.

Trolls, fake accounts, and other not-so-great things that seem to thrive on Twitter
Trolls and fake accounts present a serious problem for Twitter. Costolo said in a leaked memo that the company needs to do a better job keeping its site civil. If it doesn't, it risks losing users and engagement and turning off potential users. What's more, abusive users will turn off advertisers from using the platform for fear of another #MakeItHappy situation.

Just as bad for business is the number of fake accounts on Twitter. In 2013, Twitter performed an internal review and found that fewer than 5% of accounts were false or spam accounts. A third-party follow-up that year found that 10% of accounts were fake. And with the growing popularity of the network, more fake follower sales sites have popped up every month.

Many fake accounts don't present a big problem, but those that randomly engage on Twitter by retweeting, favoriting, and clicking links can be a big problem for advertisers. Twitter charges on a cost-per-engagement basis, and if a large percentage of those engagements are fake, the average price will decline.

Challenges for 2015
Twitter certainly faces some challenges in 2015, but CFO Anthony Noto and analysts seem to understand the challenges it faces. As long as management does its job navigating those challenges as it's laid out, it will be fine. But one misstep could cause the stock to tumble considering its sky-high valuations.

The article 3 Reasons Twitter Stock Could Fall originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Apple, Facebook, Google (A shares), Google (C shares), and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.