Guest Column: Why Twitter lost 25% of market cap even after reporting record revenues?

Twitter reported strong revenues of $243 mn for Q4, yet the stock tanked on the markets. Sanjay Mehta, Jt CEO, Social Wavelength analyses what went wrong

e4m by Sanjay Mehta
Updated: Feb 10, 2014 8:19 AM
Guest Column: Why Twitter lost 25% of market cap even after reporting record revenues?

Twitter had their first quarterly earnings report after their IPO and came out with strong revenues of $243 million for Q4, beating the analysts’ estimates of $218 million.

And yet the stock tanked on the markets and Twitter (TWTR) lost a quarter of their market cap or close to $10 billion in value after the results were announced.

What happened? What went wrong? Or what are the current challenges for Twitter?

First of all, let’s understand the market sentiment and why they rejected the Twitter stock after the Q4 reports.

Not that I am an analyst or a stock market expert, but I know that when investors are invested into a company that has never made a profit so far (their loss for Q4 was $511 million, in fact), the key driver is the phenomenal growth that the company is expected to have (which have been the reasons why new age companies such as Google, Facebook and others have commanded huge respect from investors over time, as compared to relatively slow-growing old economy businesses) and due to which, the company may scale enough to earn profits sooner or later, and then earn lot of profits later! Well, that is the theory anyway (also the reason why companies such as Flipkart, Jabong, Myntra, etc., keep getting funded despite losses). For the initial few quarters or even a few years, the investors may not even worry about the losses that the company suffers, as long as the blazing growth is continuing.

Then, what spells that growth for Twitter? Clearly, the number of active users. And which is where the problems of Twitter begin.

The growth of users has slowed down a lot, and the Q4 number of active users is barely 3.9 per cent higher than that of Q3. Comparatively, at a much larger base, Facebook is still reporting those kinds of growth rates, while Pinterest is growing much faster.

A flattening of user growth rate, and projected revenues for next quarter being lower than those of current quarter have hurt the sentiments around the stock, and have contributed to the drubbing that it received on the stock market yesterday.

But that aside, what are the real challenges at usage level for Twitter?

Before anyone jumps on me or on Twitter, let me assure you that Twitter continues to be relevant, and remains one of the key platforms on social media today. It continues to have value for users, in terms of content discovery, for breaking news, and for anything that has a ‘right here, right now’ flavour. Some people find it interesting to follow celebrities and occasionally, be lucky enough to engage with them as well.

So yes, users do see value.

Do they see sustaining value that keeps bringing them to the platform to spend long hours? Also, does it spell value for everyone?


And this is the challenge.

An extremely large number of people join Twitter out of the curiosity factor, try to dabble for some time, and then drop out, in terms of usage.

There isn’t an intuitively easy way, especially for non-techie users, to use Twitter effectively and derive benefit from it. So, that’s clearly a challenge for holding people in after they have registered as a user.

The other draw that some people (or brands) had with regards to Twitter was to build a large follower base, and then have a reach to that large base.

Guess what? It is not so easy to build large follower bases anymore.

The genuine users do not blindly follow others anymore. The sharp jumps in follower bases do not happen nowadays as they used to in the early days of Twitter.

Yes, there are still many who believe in reciprocal following - you follow me, and I will follow back. That’s more like “you scratch my back, and I scratch yours”. Not necessarily a very impactful follow in that case.

Like the challenge of building a base of organic “likes” on Facebook, even building a large base of Twitter followers now requires spends of money. And after that too, due to the restrictive nature of extent and visibility of these promoted account advertisements on Twitter, even the inorganic follower growth is not so easy.

Add to that the big challenges of the fake accounts and fake followers.

Since it does not take anything at all to create accounts on Twitter, we have seen brands, politicians, celebrities, new movie releases and many others resorting to creating very large number of such fake accounts.

And then do what?

a. Try to make it feel that their message was very popular by having these fake accounts retweet it! When you examine the accounts that are RTing the original message, you can see that most of them are having minimal follower base, and have been recently created. In fact, recently, a political leader’s support message was copied and used in exact identical words by several other Twitter handles and this was exposed, leading to tremendous embarrassment for the leader concerned. Clearly, a poor social media strategy at work!

b. Have those fake accounts follow you main account: so as to add numbers to your base. Of course, that base is doing nothing to you, because they are nothing.

c. To try and shut down alternate opinion: and this aspect is used classically for new film releases. If there is a big film released and on the first day, you start tweeting as to how boring it was, or how it was not worth seeing, you will have those host of fake Twitter accounts, taking you on, and trying to shout you down to silence.

None of these is a positive usage of Twitter.

If Twitter usage was going to boil down to spam of this kind, it is certainly not a serious medium to command valuation, in that case.

So what it clearly boils down to is for the platform to provide, clear, unambiguous, intuitive value to the stakeholders – the users first and foremost, and to those who will provide revenues to Twitter, viz. the brands.

And since clearly, it is a matter of quality and not quantity, what Twitter needs to address is to ensure that the fake followers menace is reduced, the general trolling accounts, the spammers, etc., are weeded out of the system, and then enable the real accounts to deliver more value.

Twitter will also need to find a way to make advertisers see more and better value, and innovate enough for user to keep spending longer time on the platform.

In summary then, if I have to share my list of top 5 things that Twitter needs to do now, those will be:

1. Make the entire experience intuitively easy for new users

2. Find a way to flush out fake and inactive accounts, and have some “requirement” for opening an account, so we have less junk

3. Innovate enough to give users more reasons to stay and spend time on Twitter (users are going to other platforms for other benefits)

4. In spite of the multiple clients that Twitter users use, provide value for advertisers irrespective

5. Give advertisers the means to do sharper targeting

There are challenges for Twitter at this time. And challenges are hurting where it matters most now – at the market cap. Clearly, a fix is required and required fast. Can Twitter do a turnaround? Can they reinvent? Can Twitter enable me to book tickets with a tweet, make small payments with a DM, or order grocery very easily? Can Twitter do a snapchat version, can it incorporate filters for the photographs that I share? Can they enable group tweet chats?

I don’t know which of these or which others may be some great new features to add. But they’ll definitely need to think out of the box, come up with some game changers... just to stay in the game.

The author is Joint CEO, Social Wavelength.

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