SAN FRANCISCO -- A class of investors is rallying around claims that Twitter made "false and misleading statements" about the growth of its social network.
The securities class-action, filed in U.S. District Court for the Northern District of California, seeks to recover damage from Twitter for allegedly artificially inflating its stock prices on the winds of lofty promises.
The day before the class date, Feb. 6, 2015, Twitter reported weaker than expected earnings, blaming them on seasonal factors and hiccups with the roll out of iOS 8. But Twitter " reiterated its outlook" for a strong uptick in its monthly average user (MAU) metric once it's new product initiative gained footing, court documents stated.
After reassuring investors, Twitter's stock rose by approximately 17 percent. But after reporting its results for the first quarter of 2015 and lowering its financial outlook for the rest of the year, Twitter's stock fell by about 18 percent, according to the complaint.
"However, the stock continued to trade at artificially inflated levels as defendants assured investors that new initiatives to drive user growth and engagement were still in the early stages," stated the complaint.
After announcing its second quarter results, Twitter's stock fell by about 15 percent that same day. Twitter's stock continued to trade at "artificially inflated prices," but news of that trading leaked into the market and caused widespread sales of the company's shares, the lawsuit stated.
Twitter misled investors by concealing or disregarding facts that included the company internally switched to tracking daily active users as its primary metric for growth, user engagement growth was flat or declining and new product initiatives were generating much growth, court documents stated.
Despite the popularity of Twitter, and hundreds of millions of users it tracks every month, the lawsuit evidences that there is "serious concern" from investors about the site's growth trajectory, according to Neil Shah, principal analyst at CounterPoint Research.
"This class-action suit is an extreme step from an investor pointing to losing faith in the company," Shah told the Northern California Record.
For years, Twitter has struggled to take its social network to the next level and has looked for ways to light up those hundreds of millions of logged out users it counts - the ones who have accounts, but rarely log into the site.
“There are multiple areas where Twitter has been unable to scale,” Shah
said. "One is merely from a geographic reach perspective, which has been at a standstill."
Also, Twitter’s “ad engagement vehicles” are limited in comparison to the more robust platforms for ad delivery found on Facebook and Snapcahat, Shah stated. While there are tons of tweets and retweets, Twitter still lags in “shareable content” when compared with its rivals.
“So overall, it is the platform where users engage with each other, but in very few ways marketers (or brands) can drive engagement compared to the competition,” Shah said.
The Northern California Record reached out to Twitter for a statement, but no comments were offered.