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The ugly truth in Twitter's earnings: it's shrinking into irrelevance

  • -Despite a surge in "ad engagements," Twitter revenue fell 8 percent
  • -The company's share of the Q1 online ad market was less than 2 percent
  • -Larger rivals are expected to add billions in new ad business for the period

Wall Street has had a love-hate relationship with Twitter over the last 12 months, as its shares have alternately surged and plunged around the time of the company's earnings reports.

This year has been no different, with the stock falling sharply on heavy volume three months ago on fourth-quarter numbers, only to surge as much as 10 percent on Wednesday after beating analysts' earnings estimates.

But there's one especially illuminating fact in today's earnings report, and the light it shines isn't flattering: The company becoming irrelevant in online advertising, compared to its two largest rivals — Google and Facebook.

Sales fell 8 percent for the quarter, a period in which both Alphabet and Facebook are expected to report substantial revenue growth for companies of their size. Alphabet is expected to have sold an additional $4 billion in digital ads during the first three months of the year, compared to the same period in 2016, for a total of $24.4 billion.

That's a rise of almost 20%, based on analyst estimates for its report, which comes after the bell on Thursday.

Facebook is seen to have added about $2.4 billion in additional revenue from a year ago, a surge of 45 percent, to $7.8 billion.

For the same period, Twitter sales fell by $47 million, to $548 million.

Put another way, of the roughly $32 billion in sales that the three rivals are expected to have posted for the quarter, Twitter's share of it was less than 2 percent, and falling.

While that was enough to goose the company's beaten down shares, today's trading looks more like a relief rally triggered by a belief that the numbers could have been worse.

But the revenue number shows that Twitter -- supposedly a growth company -- has a tiny and shrinking share of its primary market.

And despite today's gains, the stock has been trading below $20 a share for all of 2017 — well below its 2013 IPO price of $26.

Maybe that's because the per-share earnings estimates of analysts that Wall Street topped Wednesday morning exclude the cost of employee stock options, which Twitter has been doling out liberally for years to attract workers.

Including those expenses, Twitter -- unlike Alphabet and Facebook -- continues to post quarterly net losses.

The story of Twitter has been one of missed opportunities to make money off its daily users, even though they now number 319 million.

For all its talk of a rise in "engagement" during the first quarter, sales — a much more transparent measure of its business — dropped.

A few more quarters of this trend and Twitter's sales risk becoming a mere rounding error in the budgets of online ad buyers.

Tech investors who want to participate in this burgeoning business should know that Twitter's slice of it is becoming ever-thinner.

Watch: Twitter beats, reports stronger user numbers