After two consecutive quarters of excellent results, the 2019Q3 results released by Twitter still failed to continue the journey back from the dead. Twitter shares tumbled 20% on October 24th.

I. Advertising revenue has dropped month on month, and net profit has dropped sharply.

The culprit of the slump is Twitter's slow revenue growth in the third quarter and a sharp drop in net profit.

Year-on-year growth rate of Twitter revenue

Twitter reported third-quarter revenue of $824 million, up 9 per cent from a year earlier, while net profit was $37 million, down 95.6 per cent from $789 million in the same period last year. Among them, Twitter's net profit in the third quarter of last year included deferred tax asset-denominated allowance (Valuation Allowance), which allowed the company to earn a net income of $683 million. Without GAAP, Twitter's third-quarter net profit was $137 million, down 16% from $163 million in the same period last year.

Twitter's third-quarter revenue and net profit fell short of market expectations. In particular, advertising revenue growth slowed sharply year-on-year, falling month-on-month, dealing a sharp blow to market confidence. Goldman Sachs Group even downgraded Twitter to neutral from buy, lowered his target price from $52 to $34, and lowered his earnings forecasts for 2019, 2020 and 2021 to "reflect the company's advertising problems".

In response to the decline in advertising revenue, Twitter said in a letter to shareholders, "in the third quarter, we found errors that mainly affected our traditional Mobile App Promotion (MAP) products and took remedial measures, which affected our ability to target advertising and share data with measurement and advertising partners. We also found that some personalization and data settings did not work as we expected. We believe that, overall, these problems reduced third-quarter revenue by at least 3 percentage points or more from a year earlier. "

Goldman Sachs Group's Heath Terry said in a client report, "due to the lack of visibility into advertising platform remedies, there is uncertainty about Twitter's ability to drive broader advertiser demand, and the risk of further multiple reduction prompted us to downgrade to neutral. "

Since advertising revenue accounts for 85% of Twitter's total revenue, when there is a problem with advertising revenue, it means that there is a problem at the revenue end of Twitter, but what about the profit end?

Twitter's spending has been rising over the past year.

Revenue from 2019Q3 Twitter grew only 9% year-on-year, but other costs are still growing rapidly. Operating costs, research and development, sales and management expenses rose 15 per cent, 19 per cent, 17 per cent and 21 per cent respectively from a year earlier, resulting in a 52 per cent drop in Twitter's operating profit.

II. Daily monetization active users (mDAU) continue to grow

The only good news is that the average number of monetized daily active users (mDAU) of Twitter in the third quarter was 145 million, compared with 124 million in the same period last year, an increase of 17% year-on-year, and 139 million in the previous quarter.

Jack Dorsey, the company's chief executive, said the growth in the number of commercially available daily active users was driven by product improvements, including improvements to websites to make it easier to navigate and to be more proactive in identifying abusive content for deletion.

"driven by our good products, our mDAU has a strong growth, an increase of 17% over the same period last year. We are constantly improving relevance and testing methods to make it easier for people to find what they want on Twitter. "We will also continue to make progress in regulation and improve our ability to actively identify and delete undesirable content."

Twitter has proved with facts that a healthy and orderly platform is a good way for a social platform to prosper and thrive for a long time.

The number of Twitter's monthly active users has actually stagnated since 2015, which means it has become increasingly difficult to get new users. In response, Twitter has turned to better serve regular users, from "social networks" to "news", especially after "Trump Twitter governing the country." more and more users are starting to follow political news on Twitter, so Twitter is back to life.

Reflected in the operational data, the number of daily active users and the length of user use of Twitter began to grow again at the end of 17 years, and user stickiness continued to increase.

The increase in the number of daily active users has once again become the driving force for the growth of Twitter. Video and brand advertisers began to invest more budget into the Twitter platform. Twitter revenue grew by 24.6% in 2018, and 1Q19 grew by 18.3%, both exceeding market expectations.

But this time, the average monetized daily active users (mDAU) of Twitter continued to grow by 17% in the third quarter, even more than 14% in the second quarter, but did not bring more growth to revenue and profits in this quarter.

Whether there is something wrong with Twitter this quarter, or whether the economy or advertising environment is depressed, or both, it is worth following.

III. Hidden worries about high valuation

Due to the good data, Twitter's share price has risen sharply this year, and investors naturally have better expectations for the future, but this time the results hit everyone in the face, and people were unexpected, from optimism to pessimism.

In fact, Twitter was already worried about high valuations before the slump.

The 2019 estimate is slightly biased due to the impact of "setting up deferred tax assets" on net profit. Let's take a look at Bloomberg's 2020 forecast. In fiscal year 2020, Twitter's adjusted price-to-earnings ratio was 31, while Facebook Inc's 2020 price-to-earnings ratio was 20.

But the growth of Twitter is not as fast as Facebook Inc. Twitter's five-year expected earnings per share growth rate is slightly more than 11%, while Facebook Inc's growth rate is expected to be 22%.

In addition, analysts expect Twitter's annual revenue to grow by 17% in 2019 and slightly less than 16% in 2020. By contrast, Facebook Inc expects income to grow by nearly 26% in 2019, while annual income growth will remain at around 22% in 2020.

By contrast, the high valuation of Twitter also contributed to the collapse.

Summary

2019Q3Tweet's mDAU has risen, but expenses have outpaced revenue growth, leading to a drop in profits, coupled with worries about high valuations, and the stock price has plummeted. if this trend continues, it will be very bad for Twitter. For Twitter investors, it seems a bit difficult to see its income continue to grow at a high rate, resulting in a sustained increase in profits.