Twitter Wednesday reported that fourth quarter sales more than doubled over the past year, but the company nevertheless spooked investors by acknowledging a slowdown in new user growth and in user engagement.
The day after Twitter's first financial report since becoming a public company, its share price went from closing at $65.97 on Wednesday to $50.03 on Thursday.
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"Twitter took a big haircut today, not just a trim, as analysts and investors pounded the stock based on slowing user growth," said Dan Olds, an analyst with The Gabriel Consulting Group. "I think this is a pretty serious situation for Twitter. The biggest attraction to Twitter investors is the potential meteoric user growth. If Twitter is plateauing on user growth, then it's a much less attractive investment," Olds added.
During Wednesday's earnings call, Twitter officials said that 241 million people used the site at least once a month in the last quarter, up 30 percent from the fourth 2012 quarter, but only 3.9 percent more than the close of the previous fiscal period.
Twitter also said that in the last four quarters, average user growth was 7.4 percent, down from the average quarterly growth of 10.3 percent in 2012. Twitter reported that user engagement was off during the quarter as well -- the social network had 148 billion views in the last quarter, down from 159 billion views in the previous quarter.
Twitter's user base is still growing but not as fast as it had been. And user engagement, in general, is down.
During the conference call, CEO Dick Costolo said Twitter has a plan to fix things. "Up until last year, our growth was viral and organic. Growth was something that happened to us," he added. "We have only scratched the surface of what we believe Twitter can become. We simply need to make Twitter a better Twitter."
Costolo said Twitter is focusing on im proving the mobile user experience, making the site more visually engaging and on making the site a better tool for both public and private conversations.
Many analysts say Twitter better make such changes soon. "If Twitter doesn't get a handle on this, it could be disastrous for the stock price," said Patrick Moorhead, an analyst with Moor Insights & Strategy. "If you remember, right after Facebook launched its IPO, the world tracked their every move to fix their mobile problem. Their stock declined until they started showing signs of life. To Facebook's credit, they overcame that hurdle. I have my doubts about Twitter," he added
Analysts say Twitter must figure out whether the user growth and engagement slowdown is a symptom of a bigger problem, or is simply part of a normal up and down business cycle.
Scott Strawn, an analyst at IDC, said too early to get a handle on social media business cycles. "A lot of these companies are dependent on rapid user growth," he said. "We're really still trying to understand what those cycles look like. The first example was MySpace. We saw a lot of rapid adoption and then very rapid collapse. If you're not deeply engaged, there is that potential for rapid collapse. But we haven't seen enough of these cycles to get a handle on these trajectories."