Twitter Inc stock is Delivered a great quarter, but it’s not the new norm

Sometimes a report can lead to a bad outcome for the accompanying equipment. So is the case with social media giant Twitter Inc (stockmarket).

Twitter just reported a robust first quarter numbers that beat on both top and bottom line expectations. When struggling advertising business showed strength and seemed back on track. Still raging data licensing Business is hot and margins are much higher. Profitability is increasing. Even monthly active users count, which has been flat for two quarters, rose to a New high.

But the stock market fell after the figures by a significant amount. At the moment the stock market is 2.4%.

Why move down, despite the strong numbers?

Two things. One assessment, market shares are overvalued about $30.

There were two, the leadership is weak. Management had warned on the phone that the trends of income through the rest of the year not to look like Q1. Thus, in the 1st quarter was an anomaly and everything will calm down throughout the year.

Therefore, the stock market falls.

I think there’s more to fall. Here’s why:

Great quarter on Twitter

Even as an old bear, I see that the quarter was really good at Twitter.

The biggest drawback of this company is the decline in the advertising business. In the fourth quarter of 2016, the revenue growth of the advertising market fell into a flat line. Then, it has declined for three consecutive quarters thereafter.

But the growth of advertising revenues stumbled in positive territory in the fourth quarter of 2017 (+1%). Now, growth of advertising revenues was more than 20%, far more normal rate for digital ad player. Thus, it seems that the advertising revenue problems are largely fixed, and that Twitter on Facebook Inc (Nasdaq:FB) and alphabet Inc (Nasdaq:goodbye) the way in digital advertising in the world.

Perhaps more impressively, the monthly number of active users rose to 336 million. This is important because the monthly number of active users was flat at 330 million for several quarters, causing some investors believe that Twitter has already reached its total audience.

Clearly not so at the international level, where the platform added 5 million new users per month, the most it has added in a few blocks. Monthly growth of users needs to stay healthy, and that should be a tailwind for overall growth of advertising revenues.

Meanwhile, the data licensing Business continues to increase. These license revenues grew by 20% in the 1st quarter, last quarter to 10%. This is huge because the data licensing business carries much higher margins. Thus, the increase in data licensing is really a big driver of margin.

It is not surprising that profitability continues to roar higher. The EBITDA margin used to be below 30% a few years ago. Now, with the income from the advertising business and data licensing Business is scaling nicely, the profitability of about 40%.

Overall, this quarter was very good on all fronts. Use rose. Revenue growth has not returned. And the field remained in their uptrend.

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Weak Leadership

But management sounded a cautious tone on the quarterly conference call. CEO Jack Dorsey said that the company is still working through recovery in the advertising business, and that increased competition in the second half of the year — probably from tooling Inc. (US:snap) — will undermine growth.

Overall, sequential revenue growth by the end of this year will look like in 2016. In 2016, the 1st quarter was a huge success, but the sequential revenue growth was weak for the rest of the year. Thus, by the end of this year to live up to the hype that Q1 is installed.

Under the hood, it seems that while the market got its advertising business on the rails, the competitive situation on the digital advertising landscape is only growing. Specifically, snap is making a huge success while Amazon.com ink. (Nasdaq:events of the week) gradually turns into a formidable player.

So competition will keep revenue growth of approximately 10% over the next few years, against 20% recorded in Q1.

The bottom line on the stock market

The stock market is not the price on the revenue growth of 10% and continued growth. Nearly 50 times earnings estimates this year, the stock market price for explosive growth in revenue will continue and profitability to grow to the level Facebook.

That will not happen. As such, the stock market at these elevated levels.

At the time of this writing, Luke Lango was long FB, tough, snap, and amzn.

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