On Wednesday, Twitter will report quarterly earnings for the first time.
The company's current trading price is significantly higher than its IPO price, but Wall Street analysts that follow the company have been split on the question of whether investors should buy or sell its shares. "It goes up because it goes up," says Brian Wieser, an analyst at Pivotal Research Group who has recommended Twitter investors sell. "People are anticipating what other people will do."
Twitter’s earnings report is unlikely to deliver any startling revelations about whether the company justifies its valuation (which is based on future performance). But for those of us following along at home, here are the questions that analysts will have on their minds as they dig into the information.
Many analysts see Twitter's ad revenue as the most important line in its earnings report (it is a report, after all, about earnings). "Anything else that they do is only gravy from a revenue perspective or a new product development perspective," Wieser says.
Twitter has been experimenting with new types of ads—for instance, ads that run simultaneously with television ads or target users geographically. Meanwhile, it has hustled to get small businesses, rather than just brands, involved in Twitter advertising.
In order to experiment with more types of ads, Nate Elliott, an analyst with Forrester, argues Twitter needs to have a strong ad revenue base in place that may or may not turn out to be Promoted Tweets. "Twitter’s challenge right now is that it hasn’t found that basic marketing opportunity that allows it to just print money in a way that Facebook or Google has," he says. "I think Twitter is still looking to find out whether Promoted Tweets can be that kind of basic power house, whether that is the ad unit that can allow it to form a strong foundation and start looking for other creative ways to offer marketers value."
Advertising businesses need advertisers, but they also need users to whom those advertisers can advertise. To what degree changes in user numbers matter for Twitter, however, is somewhat debatable.
Wieser says a large shift in either direction would be important, but a typical change would have much less impact than a change in ad revenue. "A lot of people will be looking at users and usage trends, anything they want to define as engagement," he says. "For the most part, that really shouldn’t matter. Revenue generation has very little to do with user growth. They’ve got so far to go in terms of monetizing their existing userbase."
CRT Capital Group analyst Neil Doshi, on the other hand, sees user growth and engagement as indicative of whether Twitter can grow into a utility the way Facebook has. "Ultimately, when we think how big Twitter can be, we place considerable thought on how broadly the product will be adopted by users," he says. "If that number starts to slow down at a rate faster than expected, it would be challenging for Twitter to achieve mass scale like Facebook. Furthermore, it would result in a re-rating of the stock price."
Either way, Twitter has attempted to rectify one of its biggest problems in this department, which is that the service can be confusing to new users and put them off the product. It's just not intuitive that "MT" stands for "modified retweet" or that beginning a tweet with someone's handle means that only people who follow both of you will see it. CEO Dick Costolo has pledged to improve the new user experience, and the company has begun to make changes to its product that could aid this effort, like threading conversations and tweaking the homepage.
Compared to some other tech giants, Google can be stingy with the data it provides investors about its business. Facebook and Yahoo tend to break out more numbers. On Wednesday, we’ll find out where Twitter falls in the spectrum.
Those are three major questions for investors consider. But it's worth noting that another question on analysts’ minds is whether or not Twitter itself will provide an official measurement for its future performance. Doshi says that could result in less volatile estimates from analysts. "If they do provide guidance, I think it gives people a baseline to build their models from," he says.
[Image: Flickr user Robert]