Wall Street Is Lording One Number Over Twitter. Is It the Right One?

If you're one of Twitter's 255 million monthly active users or MAUs, you may have noticed company insiders sub-tweeting Wall Street. Only a suit, they scoff, would fail to recognize the value of a company your mom sees flashing across her TV screen.

Twitter stock is currently at an all-time low, trading down more than 13 percent. Today's "bloodbath" was prompted by the end of a 180 day lockup period, allowing employees and early investors to sell their shares. But the bitterness began last week, after Twitter's earnings report for the first quarter revealed decelerating growth in MAUs. The number of users grew by 14 million, 25 percent more than the same quarter last year, but the stock dropped to (what was then) a record low.

To prove its worth, we heard Twitter is actively discussing a better metric—one that Wall Street could wrap its Windsor knot around.

The sniping goes both ways: Once bullish Wall Street is now trying to elbow Twitter out of the bubble's soft embrace.

This weekend, Barron's said Twitter's stock was overpriced, even after shares dropped almost 50 percent since a December high. Jim Cramer advised viewers not to buy, while Eric Jackson, who wrote an avuncular defense of Twitter in March, shorted the stock in April. The problem is user growth, Jackson explained recently. Twitter was "rewarded generously" with a "huge valuation" in the hopes that it would one day become Facebook, which recently reported 1.28 billion MAUs. As Wall Street comes to grips with the fact that TWTR does not equal FB, the stock "has a lot lower to go before this kind of bottoms out."

Jackson also called out venture capitalist Chris Sacca, who manages about 15 percent of Twitter's shares, by name:

"It kind of surprises me when you have people like Chris Sacca come out after the earnings, after the negative Wall Street reaction and sort of talk down to Wall Street saying, 'Well you don't understand the longterm value here. You just don't get it, Wall Street.' And this is the same Wall Street that just gave this company 34x trailing price-to-revenue."

(Price-to-revenue or price-to-sales ratios are a way for investors to figure out how much today's "profitless tech companies" are worth. High price-t0-sales ratios were a hallmark of the dotcom bubble.)

The reason the tech media and industry insiders are fighting back so hard against the perception that Twitter is dying is: (1) because the service enables their latent narcissism and (2) because Twitter feels mainstream. If a startup that was invited to the Oscars and organized the world into hashtags can't work out, then what hope do the rest of 'em have?

This chorus of doom is not what Twitter wants to hear right now. Companies like Facebook and LinkedIn weathered their lowest prices after their lockups ended and insiders cashed out, even though they came roaring back.

Twitter investors are aggressively trying to build a bulwark against a stock crash. Almost three weeks ago, CEO Dick Costolo and cofounders began spreading the word that they had no plans to sell. Investors like Benchmark Capital, Rizvi Traverse Management, and Sacca have been telling anyone who will listen that they plan to hold on to the stock as a sign of total faith in their 140 character friend. Judging by today's stock free fall, the most successful part of their psyops campaign has been the anti-MAU brigade.

Monthly active users are shorthand for the health of a service—if you're growing the number of engaged customers every month, that's more click-happy humans to monetize. But Wall Street is foolish to compare MAUs between Twitter and Facebook, they argue:

Even civilians are getting in on the fun!

Wall Street likes MAUs because it lets analysts—and high frequency trading algorithms!—compare Twitter to Facebook like it's apples to apples. Twitter invites this comparison by following Facebook's lead. As one source put it: "The whole concept of penis envy? That's what Twitter has for Facebook."

But contrasting a company with revenue of $2.5 billion last quarter to a company with revenue of $250 million is never going to end up in Twitter's favor.

Let's take a closer look at how Facebook and Twitter calculate MAUs. Here's the definition from Twitter's 10-K filing to the Securities and Exchange Commission (emphasis mine):

Monthly Active Users (MAUs). We define MAUs as Twitter users who have logged in and access Twitter through our website, mobile website, desktop or mobile applications, SMS or registered third-party applications or websites in the 30-day period ending on the date of measurement. Average MAUs for a period represent the average of the MAUs at the end of each month during the period. In the discussion of our results of operations we compare average MAUs for the last three months of each period discussed in such comparison. MAUs are a measure of the size of our active user base.

Here is how Facebook defines MAUs in its 10-K:

"We define a monthly active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, used our Messenger app, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website or application that is integrated with Facebook, in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community."

As you can see, Facebook doesn't have that bit about comparing average MAUs for the last three months, which makes Twitter appear smaller since MAUs overall are going up.

The "integrated with Facebook" part is key since Mark Zuckerberg has made good on his plan to become "the identity layer" that spans "across the Internet." When does a Spotify play count towards a Facebook MAU? What about using Facebook to login to a Zynga game or read Quora? I asked Facebook for clarification about those examples. The company received my questions, but has yet to respond.

There's one giant problem with quibbling over definitions, however. As a source familiar with the company's business model explained to Valleywag, MAUs reflect Twitter's documented retention problem:

"If you have engaged users, then by that very nature you can grow your base because you have product-market fit. And the fact that people install it and churn and don't understand what Twitter is—then by that fallacy that argument doesn't make sense. That means you are not a growth company, you are not growing, so why should you even be valued?"

In other words, if Twitter were as engaging and monetizable as its backers insist, MAUs would reflect that. That might be why its backers want us to look elsewhere, as Bloomberg reported:

Sacca said Twitter shouldn't be judged by its monthly active user numbers. Twitter is being unfairly compared to Facebook, he said, where monthly active users are more important because the activity is social. At Twitter, which is more focused on the spread of information, investors should be paying attention to how people's tweets are magnified in the media and on television, he said.

Nowhere was this dissonance with Wall Street more apparent than at Twitter's Mid-Market headquarters before the earnings call. Twitter leadership and the product team under COO Ali Rowghani thought they had "killed the quarter," and were taken aback when the stock dropped, we heard. Twitter had shown Wall Street the money: exceeding estimates with $250 million in revenue, more than double the same quarter last year. But when Wall Street doles out unsubstantiated valuations like a venture capitalist, it also demands a VC-like obsession with growth.

Sacca's suggestion to look at how widely tweets are disseminated is not entirely self-serving. On Slate, Will Oremus deftly argued that it's misleading to try to juxtapose a social network like Facebook to a media platform like Twitter, which is more asymmetrical, connecting "publishers to their public."

CEO Dick Costolo certainly seemed to frame Twitter as a media platform during the earnings call when he said "Content creators, publishers, and marketers care about two things: scale and engagement."

According to Oremus, a couple changes could make Twitter appear much, much bigger, especially if the company tries to emulate YouTube, instead of Facebook:

. . . if you visit Twitter.com without an account, you won't see much. That reinforces the sense that Twitter is useless to those who have no interest in tweeting, and it prevents Twitter from showing ads to nonusers.

Both of these things are likely to change, however. Through MoPub, a mobile advertising platform that Twitter acquired last year, the company can already make money on ads that appear outside of Twitter, on third-party mobile apps. (Think of how Google reaches people with AdSense ads across the Web even when they're not actively using Google.) Twitter has 255 million active users, but it brags that it can already reach 1 billion iOS and Android users via MoPub.

In the future, Twitter is also likely to find new ways to capitalize on its vast indirect audience. For example, those tweets you see embedded in articles online could come with their own advertisements, analogous to the pre-roll ads that play before embedded YouTube videos. Twitter CEO Dick Costolo hinted as much in an interview on CNBC on Wednesday.

Oremus predicted that Twitter would open up its homepage to anyone, even users who aren't logged in, to act more like a real-time news platform. And, sure enough, last Thursday Vine (Twitter's Instagram equivalent) made a bid for "more virality" by opening up its homepage so that the general public can access looping videos from its millions of obsessive fans.

Even with that expansion and a new deal with Amazon to add items to your shopping cart through a hashtag, Twitter just can't seem to shake the specter of Facebook. While Costolo was carefully emphasizing the billion users that Twitter can reach through MoPub, its online advertising network, Mark Zuckerberg launched a homemade mobile ad network to rival both Twitter and Facebook. A personal information leech like Facebook can offer advertisers much more detailed information about the consumer they are trying to target. It will be up to Twitter to convince brands that your interest graph on Twitter is a better indicator of what you want to buy.

There's one bit of salvation for Twitter shareholders watching their stock drop. At least Wall Street is looking at MAUs and not at the number of direct messages (DMs) exchanged each day. While Snapchat and WhatsApp were fielding multi-billion offers for their messaging services, Twitter put DMs on the back burner. The company finally stopped ignoring the beloved function in December. But we heard Twitter is only sending 8 million to 9 million messages a day. For context, Snapchat announced that it was sending 700 million snaps per day last week (adjust for inflation.)

Twitter did not respond to questions from Valleywag sent last week.

Wall Street Is Lording One Number Over Twitter. Is It the Right One?

To contact the author of this post, please email nitasha@gawker.com.

[Image via Getty; chart via Yahoo Finance ]