Personal Finance

Twitter Inc Is Running out of Room to Grow... What's Next?

Twitter is still trading nearly 40% below its IPO price.

Twitter 's(NYSE: TWTR ) dismal fourth quarter earnings report on Feb. 9 clearly revealed that the social network had run out of room to grow. Its monthly active users (MAUs) grew just 4% to 319 million, and revenue rose just 1% annually to $717 million, marking its slowest growth rate since its IPO.

To make matters worse, that growth was mainly supported by its smaller data licensing business, which offset a 0.5% decline at its core advertising business. Revenues in the U.S. dropped 5% annually, despite all the Twitter-centered sound and fury of the U.S. election. Its non-GAAP net income rose just 3% to $119 million, and its GAAP loss widened from $90 million in the prior year quarter to $167 million, despite all its recent layoffs.

Twitter is still trading nearly 40% below its IPO price.

Image source: Getty Images.

Twitter didn't provide revenue guidance for 2017, but analysts believe that its top line will decline 6% this year, and its non-GAAP net income will drop 49%. All these bleak numbers explain why Twitter is trading nearly 40% below its IPO price.

However, contrarian investors might want to look beyond the current wreckage to see where Twitter might head next. Let's take a look at a few things Twitter can do to get its business back on track this year.

Hire a new CEO

One of Twitter's biggest problems is that Jack Dorsey remains the CEO of both Twitter and online payments company Square . Dorsey co-founded both companies, but he's been doing a much better job at Square, which posted double-digit sales growth over the past four quarters while narrowing its losses.

Dorsey's strategies with Twitter have been all over the map. He initially believed curating tweets with "Moments" would make Twitter more user friendly, but the feature was quickly marginalized by Snapchat and Instagram stories. In January, Twitter replaced Moments with "Explore", a simpler tab which automatically organizes trending stories and gives live videos more visibility. But those moves haven't brought back advertisers, who are likely only eyeing one metric -- Twitter's stagnant MAU growth.

A large number of key executives have also left since Dorsey's return in 2015. Hiring a new, full-time CEO could stem that brain drain and bring fresh ideas to the table -- which could finally turn the company around.

Expand internationally

The main bright spot in Twitter's fourth quarter report was its international business, which grew its revenues 12% annually and accounted for 39% of its top line. If Twitter nurtures that growth, it could offset its slowdown in the U.S.

But that might be easier said than done. Twitter's India and China bosses both quit over the past year as part of the big executive exodus. Regional microblogging platforms are also cropping up all over the world to challenge Twitter. For example, Weibo (NASDAQ: WB) -- the biggest microblogging platform in China -- recently eclipsed Twitter in market capitalization, and could soon serve a bigger base of active users.

Facebook 's three-pronged assault with Messenger, WhatsApp, and Instagram also threatens to render Twitter obsolete in overseas markets. Facebook's "Lite" app, which is designed for slower connections in developing countries, already has 200 million users. Twitter must get its overseas operations back on track before it gets marginalized by all these rivals.

Sell off non-core assets

In January, Alphabetagreed to buy most of Twitter's developer products (including Fabric, Crashlytics, Answers, Digits, and Fastlane) for an undisclosed price. Abandoning those tools meant that Twitter could no longer build an app ecosystem tethered to its social network and cloud services, but that ecosystem was too small to compete against larger app development platforms.

The sale of those products indicates that Twitter might sell off other non-core services to boost its GAAP profitability. Its rapidly growing data licensing business, which sells "firehose" feeds of tweets to companies, could be attractive to any cloud company interested in analytics and machine learning. Its MoPub platform, which delivers programmatic ads to a network of apps, could be valuable to internet advertising giants like Facebook and Google.

It wouldn't be surprising if Twitter sold off some more tools to streamline its business, but the company will need to invest those proceeds wisely into its higher-growth businesses -- like live video and new partnerships with broadcasters -- to continue growing its core business.

Evolve the main platform

Last but not least, Twitter should drop archaic character limits and make the platform more usable for mainstream users. Unlike its competitor Weibo, which facilitates user-to-user communications and clearly organizes posts by topics users are interested in, Twitter remains a one-way soapbox for celebrities and companies that corrals users toward trending topics. Weibo's live video ecosystem is also mainly supported by popular individual broadcasters, instead of pricey contracts with content providers.

Weibo's stellar growth over the past few quarters indicates that its strategies work much better than Twitter's. Therefore, if Twitter can start listening to what its users want, it might have a better chance at growing its user base again -- which would bring back advertisers and finally get the struggling company back on the right track.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Weibo. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Twitter. The Motley Fool recommends Weibo. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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