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Twitter’s revenue decline also includes a bright side

Twitter isn't going to meet its guidance for Q1 2020 thanks to a decline in advertising sales. But usage is up, which should help it once the dust settles.

With COVID-19 rapidly spreading across the globe, social media company Twitter (NYSE:TWTR) issued an earnings warning for its current first quarter. Citing the pandemic's effects on advertising sales, it withdrew its revenue and operating income guidance.

But the warning wasn't filled with just doom and gloom for the microblogging company.

Sure, the pandemic is taking a toll on advertising sales, but Twitter isn't alone in being affected by the global economic slowdown. Facebook, (NASDAQ:FB) Twitter's much bigger rival, also cautioned ad sales are being negatively impacted as the pandemic rages on.

Twitter sees first-quarter revenue down "slightly"

When announcing the warning at the start of the week, Twitter said it expects revenue in the first quarter to be down "slightly" year-over-year and for it to post an operating loss under generally accepted accounting principles (GAAP).

Twitter said its reduced expenses resulting from COVID-19 won't be enough to offset the revenue hit from the pandemic. "The COVID-19 impact began in Asia, and as it unfolded into a global pandemic, it has impacted Twitter's advertising revenue globally more significantly in the last few weeks," Ned Segal, Twitter's Chief Financial Officer said when issuing the warning earlier this week.

On a more positive note, Twitter also said usage on its platform is surging as individuals across the globe turn to the social media platform to find COVID-19 information and engage with others ordered to shelter in their homes. Twitter said global conversations about COVID-19, as well as ongoing product improvements, are driving strength in its monetizable daily active users, or mDAUs, totals. 

Quarter-to-date average total mDAUs reached about 164 million, which is up 23% from 134 million in the first quarter of last year and up 8% from 152 million in the fourth quarter. That's putting Twitter closer to the 182 million DAUs activist shareholder Elliott Management set for the company to reach by the end of the year. In order to remain at the helm, Twitter CEO Jack Dorsey agreed to stringent milestones, including the 182 million active users. That seemed like a stretch prior to the outbreak, but now Twitter is much closer to that goal. 

The writing was on the wall

The earnings warnings from Twitter and Facebook are weighing on shares at a time when the market is trying to recoup the losses from earlier in March. With Congress close to passing a $2 trillion stimulus package, Wall Street has been rallying somewhat. But Twitter and Facebook stock prices haven't seen the same level of recovery. 

Since the beginning of the month, Twitter's stock has sunk 25%. Meanwhile, Facebook is down 18%. But the warnings out of the two social media giants shouldn't come as much of a surprise to anyone following the companies. With travel halted, stores closed, and scores of people working from home, advertisers were apt to reign in their spending. Uncertainty about how long the shelter-in-place rules will be in effect across the U.S. and just how bad it will ultimately be is also weighing on ad spending. Events scheduled into the summer and fall have been postponed (like the Summer Olympics) or are up in the air (like the Republican and Democratic conventions). 

Twitter should be OK once the dust settles

But once the dust settles, and the virus is contained, advertisers should be out in force again. And when they are, a bigger Twitter may just be where they spend their money. The company was already in growth mode prior to the outbreak. It has been improving its platform by applying artificial intelligence to get rid of deepfake videos and questionable content, serving up more relevant tweets and making it easier for users to find content on the platform. On the product front, Twitter just announced it's testing "Fleets" in Brazil, which are tweets that disappear and can't be publicly commented on.

For its fourth quarter reported in early February, Twitter's revenue was up 11% and mDAUs increased by 21%. The revenue momentum may have slowed greatly -- 80% of its sales come from advertising -- but its usage is growing.

Then there's the stock. Shares are about 43% lower than their 52-week high of $45.86. Wall Street has a median price target of $34 a share with the really bullish analysts at $55 a share. That implies shares could more than double. Even at $34, Twitter's stock could appreciate 36%.

It's not clear how long the pandemic will rage on, but Twitter is growing its user base, which should translate into more advertising sales once spending resumes.

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