Read This Before You Sell Twitter Inc. Stock

By Markets Fool.com

In something of a debacle, Twitter earnings were released earlier than intended Tuesday. Shares dropped 6% after the leak and before trading was halted. A short time later, when trading resumed, the stock continued to plummet and finished the trading day down 18%. In after-hours trading, shares fell another 2%. The market's negative reaction was likely sparked by first-quarter revenue that came in below management's guidance and analyst expectations, as well as management's lowered full-year outlook.

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Despite the market's negative reaction, Twitter investors should think carefully before they sell. Not only is the stock about 20% cheaper than it was earlier this week, but there also wasn't any information in the earnings report that alters the long-term investment thesis for Twitter. Sure, the company missed its own guidance. But the underlying business is still scoring well where it matters.

Twitter headquarters. Source: Twitter. Photo byAaron Durand (@everydaydude).

The results
Twitter brought in $436 million in first-quarter revenue, well below analysts' estimate for $456.5 million and even below Twitter's guidance range of $440 million to $450 million. Management blamed the result on "lower-than-expected contribution from its newer direct response products."

Non-generally accepted accounting principles earnings per share of $0.07, on the other hand, beat the consensus expectation for $0.04.

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Going forward, Twitter said it expects its underperforming direct response products to continue to make revenue growth more difficult than expected. Reflecting this less optimistic outlook, Twitter downgraded its guidance. The company had initially predicted it would reportrevenue between $2.3 billion and $2.35 billion in 2015. The new guidance range is $2.2 billion to $2.3 billion.

A closer look
While the first quarter didn't meet analyst or management's expectations, Twitter's business is still performing well. For proof, consider some of these tidbits:

  • Revenue was up 74% from the year-ago quarter.
  • Even after a downward adjustment to full-year guidance, management expects full-year revenue to rise 61% over 2014.
  • Monthly active user, or MAU, sequential growth accelerated from 2% from the third to fourth quarters of 2014 to a rate of 5% from the fourth quarter to the first quarter.
  • Twitter's cost per engagement, or the amount it charges advertisers every time a customer engages with an ad, was up 30% from the year-ago quarter -- the company's highest growth on record for this metric.

On the flip side, Twitter's formidable revenue growth rates are rapidly decelerating. That 74% year-over-year revenue growth in the first quarter was its lowest rate since the company went public, down from 97% in the preceding quarter. In addition, management's forecast for year-over-year revenue growth of 61% in 2015 is a far cry from the 111% full-year revenue growth realized in 2014.

Image source: Twitter.

Of course, decelerating revenue is nothing new. It was already clear that Twitter could not sustain the growth of its early years over the long haul. And if slower than expected revenue growth in the first quarter really is cause for investors to lose confidence in the company's growth trajectory, the significant sell-off has probably more than accounted for this.

In all, while Twitter's revenue growth might be decelerating a bit faster than investors expected in 2015, there were no major red flags during the quarter that give shareholders a good reason to sell. This young social platform is still growing at a considerable rate. Toss in 18% year-over-year monthly active user growth and better-than-ever growth in cost per engagement, and Twitter's business looks quite healthy.

The article Read This Before You Sell Twitter Inc. Stock originally appeared on Fool.com.

Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple and Twitter. The Motley Fool owns shares of Apple 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.