Oh, Twitter (TWTR). An interesting land where Justin Bieber has more followers than the President of the US. Just as perplexing was the reaction to Twitter’s earnings report last night, which sent the stock spiraling down 11% after hours even when the company did well in earnings last quarter.

Yesterday I shared a preview of this week’s big earnings and economic announcements, which featured quite a few familiar names. Going into the week I was thinking the social media stocks reporting this week (Facebook, LinkedIn, Twitter) would have the most volatile responses to earnings, and Twitter is starting that trend off with a bang.

TWTR

Twitter actually did pretty well last quarter. They reported their first ever profit with earnings per share of 1 cent, the same as analyst estimates. Revenues beat analyst estimates at $361 million vs. the $351 million expected (and doubled over last year). And Twitter’s revenue estimates for next quarter are in line with what analysts expected too.

Overall, nothing too alarming to report. So… why did Twitter’s stock price drop 11%?

On one level, I have no idea. The market can have some kooky responses to earnings, especially for hyped up stocks like Twitter. Plus, I think all of the market volatility we saw in October is still driving big moves. Look at the similar fate felt by Netflix (NFLX) the other week when it dropped 25% after a so-so (but not terrible) earnings announcement.

That said, here are 2 items I’d point to as possible explanations for Twitter’s big drop:

  1. Twitter can’t just meet, it needs to beat big

Many investors already had positive expectations of Twitter going into earnings. This can be both a blessing and a curse. The high expectations meant that the positive earnings were likely already taken into account in the stock price before earnings even came out.

Since good earnings from Twitter were already expected, to just meet expectations may have felt like missing them to some investors. To see a big positive move up after earnings investors likely have needed to see a huge beat – even bigger than the beat they already expected.

  1. Monthly average user growth slowed (MAU)

There is one key metric for Twitter that is almost as important as earnings and revenues: monthly average user growth (MAU). Last quarter, Twitter added 13 million MAUs, for 284 million total.

The problem is that while Twitter is growing, it may not be growing fast enough. MAUs grew 6.2% from Q1 to Q2, but only 4.8% Q2 to Q3. This concerned some investors.

Investors were also concerned about declining engagement with Twitter. Twitter said active timeline views per MAU dropped 4% in the US from last year, and 9% internationally.

I’m sure there are more reasons than those two, but those are the two main ones I’d attribute the drop to. Overall, I think the huge decrease (now over 12% in pre-market trading) is more extreme than it should be given Twitter’s Q3 performance.

The extreme reaction does go to show the volatility and difficulty of internet stocks (particularly social media ones). The problem with these stocks is that they are surrounded by lots of hype and are affected so heavily by expectations, rather than actual performance to date.

I’ll occasionally trade internet stocks for a short term earnings bet, but for the most part I’d recommend staying far away from them. It’s just too hard to pin down where they’re going, and there are other stocks that will provide you good returns for less risk and lower valuations.

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