Two years since going public, social networking site Twitter is still losing money. According to its latest quarterly financial statement, the company posted a third-quarter operating loss of $105 million.
Never mind that this result is a 35 per cent improvement over the same period last year, when the company lost $161 million through its operations. Twitter’s stock price still fell sharply following last quarter’s announcement, with the company’s management team acknowledging it may not be able to turn a profit.
Analysts, too, are growing wary of the company’s long-term prospects. “If Twitter can’t get out of this situation, and it’s coming to the end of that time, they’re going to be in trouble,” said Gartner technology analyst Brian Blau.
Twitter’s stock price over time
Source: TradingView.com
INVESTMENTS KEY TO LONG-TERM GROWTH
Twitter was weighed down last quarter by increased spending. The company’s total costs jumped close to 30 per cent, rising to just under $675 million compared to $523 million in the same period last year.
Much of the added spending came from what the company calls “traffic acquisition costs,” referring to the amount Twitter must pay when selling its ads to third parties. Twitter relies heavily on advertising sales for revenue. But to broaden the reach of those advertisements through third parties, the company spent an additional $38 million last quarter compared to the same period the previous year.
The company also invested an additional $25 million in its data centres — the facilities that house its servers and networking equipment. The importance of such investments was underlined earlier this month, when millions of people worldwide were unable to access Twitter after it crashed on Jan. 15, 18 and 19.
Blau said this level of spending is not unusual for a growing technology company with global aspirations like Twitter. The problem isn’t so much Twitter’s need to invest in its future, he said, but rather that this spending is dragging on longer than anticipated. “They had said that 2015 was going to be the year of rebuilding. Well, clearly that wasn’t the case.” For its part, Twitter has already confirmed that it expects its costs will continue to increase.
FIERCE COMPETITION, FLAGGING INNOVATION ARE UNDERLYING CHALLENGES
For Mustapha Cheikh-Ammar, an assistant professor at the Ivey Business School who specializes in social networking sites, Twitter’s greatest challenge remains attracting and retaining new people to its service. It’s no secret, he said, that the rate at which people are joining Twitter has been declining steadily, in part due to stiff competition from social networking goliath Facebook and similar sites. Twitter has readily acknowledged this threat in its latest quarterly statement.
More fundamentally, Twitter has an innovation problem. Cheikh-Ammar said Facebook has had much greater success in terms of adding new features, which helps ensure people keep coming back for more. Twitter, on the other hand, has barely evolved from its original design, with little to no major modifications.
While analysts agree that Twitter must make drastic changes in order to grow, the path forward is anything but obvious.
“They’re in a real conundrum,” said Blau. “How do you change Twitter without alienating current users, while making it attractive to everybody else?”
During the company’s third quarter earnings call, Twitter’s chief executive officer Jack Dorsey re-affirmed plans to simplify services and better communicate the company’s value.
Investors will have to wait and see what new direction Twitter ultimately takes, but they will soon have another opportunity to consider their support for the company. Twitter’s fourth quarter and fiscal year results are expected Feb. 10.