- BI screenshot
Twitter shares are down more than 5% on Thursday as the company’s third-quarter earnings report continues to leave a bad taste in investors’ mouths.
No news about Twitter emerged Thursday to pressure the stock, several Wall Street analysts who cover the stock said. Rather, the extent of the struggles in Twitter’s ad business are becoming clearer after the initial bad news about the company’s slowing user growth and weak revenue forecast.
One key issue is a new data point about Twitter’s traffic-acquisition costs that the company revealed for the first time earlier this week during its earnings conference call, Macquarie Research analyst Ben Schachter said.
Twitter noted that 13%, or $66 million, of its ad revenue was network revenue, or revenue from ads it serves on partner websites. Of that $66 million, Twitter paid out $42 million in traffic-acquisition costs to its partner websites.
Most analysts’ financial models of Twitter’s business didn’t have that, Schachter said.
“That network business to me has always been what I would characterize as lower quality, because you don’t really control your destiny,” Schachter said. “You keep a lot lower percentage of the revenue, so it’s not as interesting to investors.”
The wrong ad business
Meanwhile, Thursday’s Stratechery newsletter by Ben Thompson finds more causes for worry with Twitter’s ad business. Thompson notes that Twitter’s ad strength has traditionally been with the large brand advertisers. But those advertisers like big audiences, and Twitter has struggled to grow its user base.
A better fit for Twitter, given the size of its audience, may be so-called direct-response marketers, Thompson says.
“This … is really bad,” Thompson wrote. “Not only did the Twitter product stagnate for years, it seems that the company built the wrong sort of ads business as well.”
Thompson issued a follow-up note on Friday, correcting his initial assertion that Twitter had tried direct response advertising earlier this year only to abandon the effort, and noted that in fact Twitter has been steadily increasing its bet on direct response advertising.
But he maintained that Twitter was still late to recognize the importance of direct response advertising, and noted that the rebalancing of the ad business now underway may be related to the company’s recent revenue guidance shortfall.