Twitter and its Cloud business peers are benefiting from highly enthusiastic investor sentiment. Investors appear disinterested in a widening distance between GAAP and non GAAP earnings results for these businesses.
Sandra Ward illustrated some of this disconnect last Saturday, in an article published in Barron’s Online titled Twitter’s Results: Less Than Meets the Eye. She writes: “Using generally accepted accounting principles, or GAAP, Twitter (ticker: TWTR) lost 24 cents a share in the second quarter, but it played up a non-GAAP measure that showed a two-cent profit, versus the consensus of a penny loss.”
As of the date of this blog post, August 6, 2014, a loss of $.24 per share for Twitter, amounts to $141.585 Million, USDs. This loss is actually 45.38% of all of the revenue ($312 Million, USDs) Twitter generated for the quarter. One would think investors would care about a company losing almost a dollar of every two it brought in for the quarter, but they appear not to have cared. By the time trading resumed on Monday, August 4, Twitter closed at $43.45, a mere 1% below its closing price on Friday, August 1, 2014.
While the primary driver of investor appetite for Twitter still alludes this writer, it is, perhaps, safe to assume a lot of momentum can be attributed to investor satisfaction with the non GAAP presentation of the same quarter’s results, namely the mirage of the 2 cent profit Ward notes in her article. Perhaps investors are now convinced management has “gotten the message” and subsequent quarters will continue to show profits, albeit on a non GAAP basis. Hasn’t this been the case with Facebook, which is often characterized as a direct competitor to Twitter? After all, quarter after quarter, Facebook has reported profits over the last couple of years.
What is likely to be of greater concern than this excessive investor enthusiasm in this social media business bleeding cash, (which has now opted to highlight its results, as expressed according to non GAAP) is their complacency. Maintaining confidence this business “will eventually get it right”, simply as the result of throwing cash at its problems, doesn’t make sense to this writer. When one looks at the overall market for these types of publicly traded businesses, one likely will conclude the whole sector is simply too inflated, at least at present.
Disclaimer: I am neither invested in Twitter, Facebook, nor any other social media cloud business at this time.
© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved