Why Twitter Dropped 9% in One Day

The primary knock against the Twitter business model has not gone away. Despite its growth, it is still a tiny company, and one that loses a great deal of money. In the quarter that ended on June 30, Twitter revenue as $312 million. Granted, that was up from $139 million in the same quarter the year before. However, Twitter lost $144 million in this year’s second quarter.

Some investors considered Twitter’s forecast for the balance of the year lackluster, although on a year-over-year basis, the numbers are impressive:

Twitter’s revised outlook for the full year of 2014 is as follows:

• Revenue is projected to be in the range of $1,310 million to $1,330 million.
• Adjusted EBITDA is projected to be in the range of $210 million to $230 million.
• Capital expenditures are projected to be in the range of $330 million to $390 million.
• Stock-based compensation expense is projected to be in the range of $640 million to $690 million excluding the impact of equity awards that may be granted in connection with potential future acquisitions.

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Some large portion of Wall Street believes that Twitter will never make much money from its 271 million active users. For the time being, the primary way Twitter has to drive sales is via advertising. Advertising rates for social media companies have been relatively low compared to traditional media. Twitter has not demonstrated that trend can be altered. It does not have, and is not likely to, multiple large lines of revenue like the LinkedIn Inc. (NYSE: LNKD) social network, which has proven it can diversify beyond the standard advertising model.

All in all, companies that are subject to weak business models may well be those that investors sell off as markets tumble. If so, additional market sell-offs will hit Twitter harder than many other media companies.