Stagnant User Growth Sends Twitter Stock Down 14 Percent

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The social media company's stock closed down more than 14 percent after interim CEO Jack Dorsey outlined second-quarter growth disappointment.

At first glance, Twitter had a strong second quarter, reporting revenue growth of 63 percent and adjusted earnings above what Wall Street was anticipating. But slow user growth sent the company's stock down more than 14 percent on Wednesday. 

The stock drop comes after a sobering investor call with interim CEO Jack Dorsey on Tuesday, during which he expressed disappointment in the stagnant user growth and outlined a three-pronged plan to turnaround the business that included a simplified product roadmap and better communication of Twitter's value. "You should expect Twitter to be as easy as looking out your window to see what's happening," he said. "Twitter can't just be the best window into the world, it must also be the most powerful microphone." 

Twitter reported that it had 316 million average monthly active users during the second quarter, a 15 percent increase over the same period last year but only 14 million more than it reported for the first quarter of the year. Meanwhile, user growth in the United States was practically flat. 

"The commentary around user growth definitely deflated expectations," says Pivotal Research Group's Brian Wieser. "It was a way of lowering expectations." 

Dorsey also gave investors little new insight into Twitter's ongoing CEO search. The company has been looking at candidates since CEO Dick Costolo stepped down on July 1, and many observers have suggested that Dorsey wants the full-time gig despite his job currently running payments startup Square. When asked during the earnings call about his interest in the job, Dorsey avoided a direct response by saying, "My focus is entirely on raising the bar of our execution. ... I am focused on what I believe to be the most meaningful thing and I'm spending a lot of time on it." 

There have been rumblings about a Twitter sale ever since Costolo announced his departure in June, and Dorsey's straight talk with investors on Tuesday may have made an acquisition even more likely. The stock dipped down to its 52-week low of $31.06 at one point but eventually closed down 14.5 percent for the day to $31.24, lowering the company's market cap to just shy of $21 billion. 

"If it's cheaper, it's more attractive," says Wieser, adding that the best outcome for Twitter would be the recognition (whether internally or from an outside buyer) that it will never be a widespread service, something Dorsey mentioned on Tuesday as his goal for the company. "There's nothing like Twitter. It's a different communications vehicle," Wieser adds. "They're focused on being ubiquitous, but they're not and they won't be. The best outcome is to focus on building the best business as a niche platform."