Elon Musk to Blame for Twitter Slowdown? | Tech News

Elon Musk to Blame for Twitter Slowdown?

In times like these, it’s easy to lose sight of the bigger picture. Take Twitter, which this morning blamed uncertainty related to Elon Musk’s acquisition as a factor in its second quarter slowdown

| Updated on: Jul 23 2022, 23:29 IST
A deeper look at Twitter's financials reveal that the problem of slowdown is much deeper than Elon Musk's comments.  (REUTERS)

In times like these, it's easy to lose sight of the bigger picture. Take Twitter, which this morning blamed uncertainty related to Elon Musk's acquisition as a factor in its second quarter slowdown, along with “industry headwinds associated with the macroenvironment.” That sounds a little as if Twitter is playing to the anti-Musk crowd. The company's 3% revenue growth in the quarter — excluding the contribution to the prior year quarter of its recently divested MoPub business — is pretty much what you would expect in this economic environment, given how Twitter has performed relative to other internet ad companies in the past.

The easiest comparison is with Snap, which reported on Thursday night that its revenue growth slowed to 13% from 38% in the first quarter, as advertisers pulled back amid rising inflation and other challenges. Twitter's revenue growth in the first quarter was 22%, so a 19-percentage-point drop doesn't seem out of line.

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Moreover, recall that in the second quarter of 2020, when Covid lockdowns briefly crushed the ad business, Snap's revenue growth slowed to 17% from 44% in the first quarter. Twitter's revenue dropped 19%, having risen 2.6% in the first quarter.

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Twitter's ad performance certainly lags Snap, but that's nothing new. From 2017 to 2021, Snap's revenue growth averaged 60% while Twitter's averaged 16%. Sure, Snap was a younger company, so it could be expected to grow faster. But over the same period, Facebook parent Meta Platforms averaged 34% revenue growth. Twitter's desultory performance, of course, is why the prospect of a Musk takeover held appeal. It's a bit much, then, for Twitter to now blame Musk for its weak performance.

It's not just Twitter where it's easy to lose sight of the forest for the trees. Investors may be overreacting to Snap's results as well.

Snap warned in May that the “macroeconomic environment has deteriorated further and faster than anticipated” when it reported first-quarter earnings in April and projected 20% to 25% revenue growth in the second quarter. Snap stock promptly dropped 43% to just below $13. After recovering in recent days to above $16, the stock dropped more than 35% to just above $10 Friday morning.

At this price, Snap is trading at 3.2 times forward revenue, according to Bloomberg data, right in line with Meta Platforms and only a little ahead of Pinterest. Yet analysts expect Meta to report next week flat revenue for the second quarter, while Pinterest is expected to post 10% revenue growth. In other words, both companies lag Snap in growth, while Pinterest faces more fundamental questions about user growth.

Snap may be getting punished for how it communicates its expectations. In its May statement, the company said it would report revenue “below the low end” of its guidance. Snap's actual results ended up a little under where Wall Street guessed they would be. But in this environment, uncertainty is the name of the game.

Investors may also be losing confidence in Snap's long-term prospects. In a note this morning, MoffettNathanson analyst Michael Nathanson said that “there is risk that Snap will be unable to invest enough to compete with rival platforms, and user growth may begin to falter.”

There's clearly a risk of that, given how fickle Snap's young audience is. But you could also make the case that companies such as Meta, grappling with existential issues such as toxic content and competition from TikTok, and Pinterest, whose management is in transition, face greater uncertainty. Indeed, Snap's second quarter performance don't augur well for what Meta and Pinterest report for the same period. As for Snap, it seems a little early to abandon hope in the company's long-term growth prospects.

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First Published Date: 23 Jul, 23:29 IST