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Twitter (TWTR) Stock Slumps Despite Earnings Beat: Here's Why

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Despite opening higher, shares of Twitter (TWTR - Free Report) sunk more than 5% in early morning trading Wednesday, shortly after the company released its first quarter fiscal 2018 earnings report. Twitter was able to top estimates on both the top and bottom line, but it is possible that investors are nervous about one of the social media giant’s key growth catalysts.

Twitter reported adjusted earnings of $0.16 per share, beating the Zacks Consensus Estimate of $0.12 and improving about 45.5% from the year-ago period. The company was also able to record its second profitable quarter in a row on a GAAP basis.

Meanwhile, Twitter posted Q1 revenue of $664.9 million, crushing our consensus estimate of $610 million and surging roughly 21.3% year over year. Twitter reversed its trend of slumping revenue with modest 2.1% growth in Q4, but today’s results show the top line is really starting to take off (also read: Twitter Q1 Earnings & Revenues Top Estimates, Up Y/Y).

Part of the reason for this revenue improvement is continued user growth. Twitter said that it had 336 million monthly active users (MAUs) at the end of the first quarter, up from 328 million in the prior-year quarter. Heading into the report, our exclusive Zacks Non-Financial Metrics Consensus Estimates were calling for Twitter to report MAUs of 334 million.

However, one of the key growth catalysts for Twitter was its data licensing division. The social media giant totaled net sales of $90 million in this segment, topping our consensus estimate of $84 million and expanding about 21.6% year over year. Given that the margins in this business are likely better than the advertising unit, it is possible that this growth truly buoyed Twitter’s Q1 profits.

This is potentially problematic when considering the public’s increasing scrutiny of data privacy—an issue that has dominated the internet industry since details of Facebook’s (FB - Free Report) Cambridge Analytica scandal first emerged.

Twitter’s reliance on data licensing was highlighted by famed short sellers Citron Research last month. The firm argued that the company would face backlash once investors realized that it would generate nearly $400 million this year “by just selling user data.”

Twitter quickly issued a statement refuting this claim, arguing that it does not sell data and instead uses its data licensing division to help “capture the amazing uses of Twitter by building on that public data.”

It is also worth noting that Twitter did witness solid growth in its larger advertising business in the most recent quarter. Ad engagements were up 69% year over year, with total advertising revenue coming in about 21% higher.

Twitter recently shifted to auto-play video, which lowers cost per engagement but lifts overall activity. The company also mentioned that it is working to improve its advertising platform with the help of new technologies.

“Our machine learning efforts continue to benefit advertisers as we continue to refine our targeting and ad-matching capabilities,” the company said in its shareholder letter.

Finally, investors should realize that the market was already anticipating a great report from Twitter. The stock had surged more than 11% in the four trading periods prior to the earnings announcement, and with other concerns weighing on the broader market, it is not surprising that TWTR is feeling some pressure this morning.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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