Here's 1 Reason Twitter Is Struggling to Grow Users

By Markets Fool.com

Image source: Getty Images.

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It's been a rough year for Twitter . On a one-year basis, shares of the microblogging site are down more than 50%. The majority of this underperformance has been on current CEO Jack Dorsey's watch, as Dorsey assumed the role of interim CEO on July 1. Interestingly enough, former CEO Dick Costolo endured a much narrower 14% loss over his last twelve months as Twitter's CEO.

Dorsey's focuses have been to improve the product and user experience. And by those measures, Dorsey has succeeded. User-friendly updates Dorsey spearheaded include introducing Twitter's curated Moments feature; lengthening conversations, by no longer counting replies and media attachments against character limits; and beefing up anti-harassment policies. Unfortunately, these updates have not been able to reverse the stock's poor performance.

Twitter's poor performance isn't due to revenue growth -- Twitter's revenue grew 58% on a year-over-year basis last fiscal year -- but to slowing monthly active user, or MAU, growth. However, if the quote below is correct, Dorsey isn't to blame for Twitter's falling stock price.

"They kind of faked it"

Twitter has seen its year-over-year MAU growth rate fall from 18% in the first quarter of 2015 -- former CEO Dick Costolo's last full quarter -- to only 3% in the first quarter of 2016, the most recent reported.

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An article in Vanity Fair points to a reason for this rapid drop (emphasis is mine):

I have been told by people close to the company that, in the face of mounting pressure from Wall Street, Twitter occasionally resorted to what most start-ups do when they need to goose the numbers: they kind of faked it.

This happens at virtually all social networks; the company sends an email to inactive users who haven't been on the service in a few months, informing them there is a problem with their username or account, which leads people to log in to fix the situation. Magically, those people become monthly active users even if they were not.

The article goes on to say Dorsey was not employing this trick, which may explain the user-growth drop-off. However, Dorsey can be forgiven for slowing MAU growth compared to the "fake" growth rates produced by his predecessor.

Quality versus quantity

The Vanity Fair article is correct that most social networks design their sites to emphasize metrics investors want to see. Even Facebook is not immune, adding things like daily birthday and live-streaming notifications. Facebook's updates have had a tremendous effect in increasing the company's MAU figure, which has grown at an annualized 14.2% clip over the last three years. But even more impressively, they have increased Facebook's daily active users by 17.9% during that same period.

The key question, of course, is whether these actions are adding value and increasing engagement or are simply being employed to pad MAU figures. It seems clear Facebook's updates are the former while Twitter's actions under Dick Costolo are the latter. Another problem is that it's hard to properly define user engagement; even the company acknowledges the problems in measuring this metric.

Ad engagement, which is how the company makes its revenue, is up 208% over last year's total. But this was due to a shift to autoplay video and increased ad load (read: more ads), rather than to increased viewing times, increased users, or more-compelling ads. Of course, changing the ad type to autoplay renders it a poor proxy for user engagement.Additionally, there's an outer bound to growing revenue by autoplaying videos and adding advertisements, because increases in ads have a negative effect on the user experience.

In a perfect world, Twitter would be able to continue to grow its ad engagements by growing its user base. Can Dorsey reverse the trend and make this happen? The jury's still out on that, but it's likely he's doing better than the numbers suggest.

The article Here's 1 Reason Twitter Is Struggling to Grow Users originally appeared on Fool.com.

Jamal Carnetteowns shares of Facebook. The Motley Fool owns shares of and recommends Facebook 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.