Why Twitter, Inc. Stock Plunged 27% in July

What happened

Shares of Twitter Inc. (NYSE: TWTR) declined 27% in the month of July, according to data from S&P Global Market Intelligence, after the social-media site announced solid quarterly results, but left investors concerned over the impact of user headwinds.

Twitter dropped 20.5% on July 27, 2018 alone -- the first trading day after its second-quarter report hit the wires. In that report, Twitter revealed that quarterly revenue had climbed 24% year over year -- or 27% excluding its depreciated TellApart product -- to $711 million, while adjusted net income arrived at $134 million, or $0.17 per share. Most people watching the stock were anticipating lower revenue of $696 million and roughly the same earnings.

So what

However, Twitter also confirmed that its average monthly active users last quarter declined by roughly 1 million people as compared to the same year-ago period, to 335 million -- a change the company blamed on "decisions we have made to not move to paid SMS carrier relationships, prioritizing the health of the platform, and, to a lesser extent, [the impact of general data protection regulations]."

Of course, it was widely reported last month that Twitter had acted to remove millions of fake and suspicious accounts from its namesake platform. And the company is doing an admirable job maintaining profitability and growing revenue despite its shrinking monthly user base.

What's more, it's worth noting that Twitter's average daily active users grew 11% year over year during the quarter, indicating more people are turning to the platform more often as part of their daily routines. For that, Twitter credits product improvements such as new machine-learning algorithms to make it easier for users to find and follow specific topics, events, and interests.

Now what

During the subsequent conference call, management also told investors to expect Twitter's number of monthly average users to continue declining into the third quarter in the "mid-single-digit millions range." In short, the market appears concerned that Twitter can't continue bolstering its top and bottom lines indefinitely without ultimately growing the number of overall users who help drive it. Until that trend changes for the better, I suspect Twitter stock will likely remain under pressure.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.