What Happened

Twitter reported lower-than-expected profits, but its stock is skyrocketing. This is partially due to better-than-expected revenue, but mostly because it also reported a substantial increase in its user base. A larger user base means Twitter has more potential to grow revenue and profits. Twitters stock is up over 16% at time of writing.

(Below is Investopedia's original earnings preview, published 1-29-20)

What to Look for

Twitter Inc. (TWTR), the high-profile social media company best known for news-breaking tweets from celebrities and politicians, has seen better days. Twitter shares are down sharply since announcing dismal quarterly results last fall, and investors will be watching to see if the company will do better when it reports earnings on February 6, 2020 for Q4 2019. A key metric investors will focus on is Twitter's monthly active users (MAU), seen as the key driver of its growth. Analysts are expecting monthly active users and revenue to rise in Q4, but also see a 45% drop in earnings per share. The stock has dramatically underperformed the broader market over the past 12 months, providing investors with a total return of just 5.7% compared to the S&P 500's total return of 24.3%.

One Year Total Return for S&P 500 and Twitter
Source: TradingView.

It was a volatile year for both Twitter's financial results and stock in 2019. Twitter shares were outperforming the market for much of the past year on strong earnings reports for Q1 and Q2. Robust earnings reports in Q1 and Q2 saw Twitter's stock make one-day jumps of 15.6% and 8.9%, respectively. But the stock tumbled following a Q3 report that showed earnings dramatically missed analysts' expectations. They were the worst financial results the company has seen in about two years.

Earnings per share (EPS) came in at $0.05 in Q3, down 95.5% YOY and the lowest level since Q3 2017. That also was Twitter's first year-over-year (YOY) decline in EPS since Q2 2017. Revenue for Q3 grew at a rate of 8.7% YOY, the slowest rate since Q4 2017. In its letter to shareholders, Twitter said results were hurt primarily by "revenue product issues" and greater-than-expected advertising seasonality for the months of July and August. The company's shares plummeted following the poor results, closing 20.8% lower than the previous day's close. 

TWTR Key Metrics
  Estimate for Q4 2019 (FY) Actual for Q4 2018 (FY) Actual for Q4 2017 (FY)
Earnings Per Share ($) 0.18 0.33 0.12
Revenue ($M) 994.8 908.8 731.6
Monthly Active Users (M) 339.4 321.0 330.0

Source: Visible Alpha

As mentioned earlier, investors are not only concerned with Twitter's top and bottom lines. They are also interested in the company's monthly active users (MAUs) and how quickly that metric is growing. Twitter classifies monthly active users as account holders who logged in or otherwise accessed Twitter via website, mobile app or other access point within a 30-day period. Average MAU for a quarter represents the average of each month's MAUs within the three-month period. Twitter stopped disclosing monthly active usage after Q1 2019.

Twitter's average MAU for Q3 was one of the bright spots amid the weak revenue and earnings results. Average MAU grew 3.4% compared to the year-ago quarter, marking the first quarter of positive YOY growth since Q2 2018 and the fastest growth since Q4 2017. Analysts estimate that average-MAU growth accelerated to 5.7% during Q4.

A related metric -- ad revenue per average monthly active user -- represents how much ad revenue is generated by each MAU. Ad revenue rose 5.2% to $2.10 per average MAU in Q3 compared to the same quarter a year ago. Analysts expect that growth to slow to 4.4% in Q4, reflecting a deceleration trend that began in Q4 2018. Still, as long as that figure keeps growing, it means Twitter is able to generate more ad revenue for each MAU it attracts and retains.