Twitter Inc (TWTR) Earnings CSI – Shortsighted Wall Street Reaction?

So, Twitter Inc (NYSE:TWTR) got walloped because Wall Street is concerned with user growth. How fleeting beauty can be for the share-beholder. Now the 140 character, social site's nose is broken and bloody. Is it time for investors to consider buying the battered stock or run the other way.

Let's examine the financial statements and charts to mark out the pros and cons.

The first thing we notice is the enormous jump in costs on the income statement, most of which could payoff in the long run. Revenue grew by 116%; meanwhile, the "bad" costs such as cost of revenue increased by 205.14% and general and administrative expenses skyrocketed 350.88%. Overall, the two accounted for 74.25% of revenue for 2013 versus 46.24% in 2012.

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Despite cost of revenue and general and administrative expenses outrunning sales, had management been able to keep the pair in-line with revenue growth, it would have only added $0.13 to the bottom-line; although, a $0.16 bullish surprise would have looked better than $0.03 surprise reported.

Now on to the "good" costs: research & development (R&D) and sales & marketing. Unless management misfires on both, investors should eventually reap rewards from these line items. We noticed a similar pattern in Facebook Inc's (NASDAQ:FB) initial earnings report. At the time, iStock forecasted better days ahead of the king of social sites while the rest of the world was dumping on FB. Facebook was trading around $23 when we wrote Facebook (FB) Earnings - What The Market Is Ignoring About It.

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Similar to FB, Twitter's sales and marketing went into orbit, vertically climbing 515.98% year-over-year (YoY). While that's staggering, R&D went all moon shot, up 878.8% YoY.

Once again, had management left the debit card home once in a while and increased R&D and sales and marketing at the same pace as revenue, it would have added $0.78 to earnings. In total, less aggressive spending on the good and bad costs add up to $0.91 per share. Imagine Wall Street's reaction had Twitter posted a bullish surprise of $0.94 – do you think the stock would have tanked nearly 25%? We don't - no matter if nobody new signed up.

As for where the slide might come to an end, $45 is a firm level of support as the stock finished its first day of trading at $44.90. If $45ish has holes in the safety net, then $39-$40 could come into play. From our experience, the initial waterfall usually accounts for 90% of earnings driven selloffs, which means TWTR probably drifts lower for a little while, catches a bottom (most likely intra-day), and then reverses higher.

If the stock continues to backpedal, you'll know that bulls are ready to take charge again when the stock closes above $51ish. On the other hand, our experience says not to trust an immediate U-turn.

Overall: Twitter Inc's (TWTR) announcement shows management is committed growing in the future, which should ease the worries of user growth. Additionally, the income statement reveals plenty of wiggle room for the executive team to produce explosive earnings surprises in upcoming quarterly checkups, provided they can temper the urge to splurge.