Twitter is having a moment.
The social media company’s stock closed at a three-year high of $43.49 Tuesday and is up 155 per cent over the past 12 months.
Why? Well, it’s surely not because of its user growth. Twitter’s user count was 336 million last quarter — just 3 percent higher than a year ago. But despite stagnant growth in user numbers, there are several reasons investors seem enthusiastic about Twitter. Here’s a rundown.
There may be more money to be made. User growth might be sluggish, but according to JPMorgan, it’s what you do with the users that counts. Doug Anmuth, an analyst with the bank, issued a note explaining that the platform is making better use of its existing users. Engagement among Twitter’s users has improved for six quarters and click-thru rates have grown. That’s helped the company wring more money out advertisements, Anmuth wrote.
Twitter is finally profitable, though barely. Twitter turned a profit — $91 million on $732 million in revenue — for the first time in the fourth quarter of 2017. That became more than a blip when Twitter surprised investors with a $61 million profit in the first quarter. It’s too early to say if that’s a trend. But it is worth noting that it required heavy cost-cutting — in sales, marketing, research and development, and stock-based compensation — to achieve.
Welcome to the S&P 500. Earlier this month, S&P Dow Jones Indices announced Twitter would replace Monsanto in the S&P 500. The news helped push the stock price above $39 for the first time in three years.
Tech stocks are up. After a tumultuous couple of months — which coincided with the period in which Facebook’s handling of user data in the Cambridge Analytica scandal provoked much ire toward big tech firms — investors are returning to technology.
What now? The growth is unlikely to continue at the same pace. Symbolic achievements like entering the S&P 500 don’t come along every week, and achieving profitability via cost-cutting is in stark contrast to many other tech firms, like Google and Facebook, that have cash rolling in.
Plus, joining the S&P 500 is not necessarily a recipe for strong performance in the 12 months that follow. From The Wall Street Journal earlier this week:
New entrants to the S&P 500 outperformed the index by a median of 17 percent in the year leading up to their inclusion in the index, according to a Ned Davis Research analysis going back to 1973. Yet one year after their inclusion, stocks tended to underperform, lagging behind the S&P 500 by a median of 4.1 percent.