For a long while, Twitter was one of the most promising stocks in the tech space. However, in recent quarters, the company has faced a major issue; one which investors will be watching closely. Today, we'll talk about that issue, user growth and retention. We'll also talk about what we've seen from previous earnings reports, what we're likely to see when twitter releases their report, and how to trade the resulting trends.
Twitter's Biggest Problem
For Twitter, their biggest problem is user growth and retention. While the company has a stronghold on users from sectors like the media, investing, and business, they are lacking growth. Unfortunately, the average consumer simply doesn't see as much value in the social network. So, in the area of user growth, Twitter has slowed down exponentially; leading to major questions surrounding their stock and proving to be a major deciding factor in Dick Costolo's decision to resign from his position as CEO.
With all of that said, the most important factor to watch in the earnings release that happens on July 28th is user growth. If the growth in the quarter has been positive, investors are going to be extremely exciting; pushing the stock further up. However, if user growth is negative, it will likely spark a major sell off.
Why I Think Twitter Will Disappoint With Regard To User Growth
Unfortunately, in my opinion, there are a few signs that user growth is going to be disappointing for yet another quarter. The biggest red flags include…
- Dick Costolo's Resignation – I think the most damning evidence that we have that Twitter's user growth is going to disappoint is the fact that Costolo resigned. The reality is that under Costolo's guidance, Twitter has made several attempts to pick up user growth; all of which proved to fail as of the Q1 earnings release. However, it wasn't until a couple of months into Q2 that Costolo resigned. In the humblest of my opinions, I couldn't imagine that Costolo would make the decision to resign if the data released in the report was expected to be positive. In that case, he simply could have weathered the storm for a short while and wowed his audience. However, that's not what he did. Instead, he resigned; ultimately admitting failure before the numbers disappoint.
- Little Build Up To Earnings – Lets face it, when companies do well and know it, they tend to build up the suspense before earnings. Earnings season is also press release season, it's the season for the stock to take the forefront of the media. However, we haven't seen much of Twitter at all in the media recently. I think this is also a sign that the Q2 report is likely to disappoint.
How To Trade The Trends
First off, it's very important never to start trading before the event happens. While all signs point to negative news, positive news could be the result…no one can tell the future! With that said, wait until the report comes out. In the highly likely event that user growth disappoints, earnings won't mean much; even if they are positive. So, if user growth is poor, it's time to start trading put options to run the trend down. However, in the highly unlikely case that Twitter user growth is positive, investors are likely to be excited; again, this is likely regardless of earnings. Therefore, if you see positive user data, the profitable move will be call options.
What Do You Think?
What do you think we're going to see from Twitter and why? Let us know in the comments below!