3 Reasons Twitter Has More Growth Ahead

REUTERS/Kacper Pempel/Illustration/File Photo

Twitter (NYSE:TWTR) surprised investors in its fourth quarter when it returned to revenue growth after posting year-over-year declines for three quarters in a row. Revenue increased 2% year over year to $732 million, crushing a consensus analyst estimate of $686 million. As a result, the stock soared as investors recalibrated their expectations for the company.

But can revenue continue to climb in 2018? A close look at some of the tailwinds behind Twitter's strong fourth-quarter results suggests this return to growth is here to stay. Here are three reasons to expect more of it from the social network.

1. User metrics are looking good

Twitter has consistently said its revenue growth will ultimately follow its user growth, and the latter has improved. The fourth quarter was its fifth quarter in a row of double-digit growth in daily active users, which edged up 12% year over year during the period.

Making this trend even more notable, daily active user growth was broad-based, management said. Five out of its top 10 global markets enjoyed double-digit growth in daily active users.

Monthly active users increased by only 4% year over year to 330 million, but CFO Ned Segal said in the earnings call that its daily active user trends are what they're eyeing more closely. As he said, "[W]e feel like continuing to share the absolute number of MAU -- as we've done for some time -- gives you a sense for a number that's higher up in the funnel and giving you the percentage growth for DAU gives you a sense for our trajectory in driving usage of Twitter as a daily utility."

As engagement gets better on Twitter, marketers will have more reason to invest in the platform.

2. Ad products are much improved

Just as important to Twitter's growth story is the effectiveness of its ad products. Fortunately, its recent focus on improving its core ad products has been paying off. Ad engagements were up 75% year over year in Q4 while costs per engagement (CPE) for marketers were down 42% year over year. Furthermore, click-through rates grew across all of its major ad types on a year-over-year basis.

The net effect is that Twitter's advertising revenue is turning upward and marketers are getting more positive results. "When advertisers are getting lower costs, higher clickthrough rates, and more engagements due to better ad formats, higher relevance, and more audience and engagement," Segal said, "they get a better ROI on Twitter."

3. Twitter is investing in sales execution

According to the company, revenue growth in its fourth quarter was also spurred by improved sales execution. In 2018, it aims to keep capitalizing on the momentum it's seeing from its sales efforts.

As Segal explained, "If you look at expense growth, there may be opportunities to rationalize costs, but we're really focused on investing to grow in 2018. We'll invest in the product, both in our information quality efforts and in driving audience and engagement, and we'll also invest in sales to make sure that we've got the right folks on the ground talking to advertisers about all the great things happening on Twitter right now."

All three of these catalysts helped drive revenue growth in Twitter's fourth quarter, and each looks poised to continue in 2018.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.