Don’t Rush the Cash Flow

TWTR crashed 20% last week after Twitter’s earnings report indicated a slowdown of user growth.

twitter-fail-whale.top

The income statement, at first glance, would appear to be a winner – TWTR beat analysts’ revenue expectations by 12%, with reported earnings of 2 cents per share as opposed to the 2 cent loss that was expected.

Silly Twitter. You’re an internet stock, which means shareholders care about user growth, not cash flow. Every last cent should go towards making the fire burn hotter.

Remember, Facebook was founded in 2004 and did not become cash-flow positive until the end of 2009. Google was founded in 1998 and turned profitable in 2001, with the invention of Adwords. LinkedIn was founded in 2003 and probably didn’t become profitable until 2010.

Check out these gross margins:

Quarterly Gross Profit Margins, Dec 2013. Source: ycharts.com
Quarterly Gross Profit Margins, Dec 2013. Source: ycharts.com

Twitter, you have lower profit margins than Facebook, Google, or LinkedIn. If you are coming back with positive net income, you’re doing something wrong. Your cash flow is too strong. Get back out there and lose more money for your shareholders!

But only in the name of user growth, of course.

See Also:
Which Internet Stock is the Most Overvalued? –New Yorker

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