Twitter Earnings Preview: What Really Matters

Source: Twitter.

Twitter stock is under heavy selling pressure lately. Shares of the short-message social network are down by nearly 35% from their highs of the last year, mostly because investors are dissatisfied with the company's growth rates over the last several quarters. Twitter is scheduled to report earnings on Tuesday, July 28, and investors will most probably pay a lot of attention to user growth, engagement, and monetization in the coming earnings release.

On sales and earningsWall Street analysts estimate on average that Twitter will report $480.8 million in revenue during the second quarter of 2015, which would represent a year-over-year increase of 54% from the same quarter last year. The highest estimate from analysts is $508.4 million in sales during the quarter, while the most conservative forecast is for $469.8 million. The company's guidance is for revenue to be in the range of $470 million to $485 million, so Wall Street estimates are only moderately optimistic in comparison to guidance.

During the first quarter of 2015 Twitter delivered $436 million in sales, an annual increase of 74%. While revenues are clearly growing rapidly, the number was below the $456 million expected by analysts, and this was one of the main disappointments from Twitter's latest earnings release.

On the earnings front, Wall Street is on average forecasting net income of $0.04 per share. Estimations vary considerably, though, as forecasts go from a breakeven quarter to a net gain of $0.09 per share. Twitter is in full growth and reinvestment mode, so earnings can fluctuate widely from quarter to quarter, and investors will probably put more weight on revenue growth than earnings figures.

What really mattersThe main factor hurting Twitter stock is disappointing user growth. The company ended the first quarter of 2015 with 302 million monthly active users, a year-over-year increase of 18%. While the platform is already quite big and growing rapidly, Twitter pales in comparison to Facebook and its gigantic user base of 1.44 billion monthly users growing by 13% annually in the first quarter of 2015.

Considering that Twitter is much smaller than Facebook, investors and analysts are demanding faster growth from Twitter. The company admits that it has been underperforming in this area, and this was arguably one of the main reasons behind the resignation of former CEO Dick Costolo. In this context, Twitter is making a series of changes to accelerate user growth and increase retention.

One of the main problems is that many beginning users find Twitter's platform much more complex and confusing than Facebook. When you don't understand how the Twitter language works and you don't know whom to follow, the overall Twitter experience is not very enjoyable or gratifying.

The company is trying to solve this problem by providing an instant timeline, so that beginning users get a fully populated timeline based on their areas of interest. Twitter is making it easier for users to find relevant content via pages that are specifically created around a specific topic, and the company is exploring content curation alternatives to increase the simplicity and overall quality of the user experience.

Twitter is also pushing its new "while you were away" feature, which shows popular tweets that the user may have missed by not being online at the time of publication. The main idea is that users don't need to be constantly monitoring their Twitter feeds in order to enjoy the platform.

Twitter is aggressively betting on video content with services and applications such as Vine and its Periscope live-streaming service. In addition, the company has recently improved its private messaging capabilities, as it intends to gain ground as a popular platform for both private and public conversations.

Investors will most probably put a lot of attention on user growth, engagement, and retention when scrutinizing the coming earnings report from Twitter. In addition, monetization levels, meaning Twitter's ability to make money from users and their interactions in the platform, can be another crucial factor to watch.

In order to sustain revenue growth, Twitter needs to rely on some kind of combination of user base expansion, increasing engagement from those users, and higher monetization of user activity. For this reason, these variables are of utmost importance for investors in Twitter stock.

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Andrs Cardenal has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of 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.

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