By Seth Fiegerman From Mashable

Who would have thought a social network announcing that it had topped 250 million active users would be seen as such bad news?

On Tuesday afternoon, Twitter revealed that it had 255 million monthly active users in the first three months of this year, an increase of 14 million users from the previous quarter and a gain of more than 50 million users from the same quarter a year earlier. While that might sound like a lot in the aggregate, user growth measured on a year-over-year basis continues to slow.

Wall Street responded to what was otherwise a pretty positive earnings report by sending the stock down more than 10% overnight to its lowest trading price since going public in November. The media responded with more than a few headlines that might keep some Twitter executives up at night:

“Twitter User Growth Slows as New Products Fail to Excite”

“Twitter stock tanks. Not ‘the next Facebook'”

“A Eulogy For Twitter”

Reports of Twitter’s demise have been greatly exaggerated, but then again reports of Twitter’s ascent were greatly exaggerated too.

A little more than a year before Twitter went public, there were reports that the social network had 500 million users, but many of those “users” were likely inactive or spam accounts. In early 2013, Twitter executives reportedly projected that the social network would hit 400 million users by the end of that year, but growth was clearly not what they expected.

Twitter is not yet a 500 million user social network and it’s certainly not a billion-plus user network like Facebook. At its current growth rate, it may be years before Twitter approaches the former, and it may never achieve the scale of the latter.

That, in a nutshell, is the key issue surrounding the company at this stage: Investors are coming to terms with the idea that Twitter is unlikely to achieve Facebook-level mainstream adoption. The question is how much does it matter for Twitter if its user base maxes out well below that level.

“It may not matter to Twitter if they’re at 300 million users or cap out at 400 million users longterm,” says Arvind Bhatia, an analyst with Sterne Agee. “They can still make a lot of money, but the valuation will need to be adjusted.”

Twitter expects to do more than $1 billion in revenue this year with more promising ad products in the works and its user base should continue to inch towards 300 million. And thanks to its acquisition of MoPub, Twitter can now serve ads to more than one billion devices. All of that is more than respectable for an Internet company, but its current user base and business is hardly enough to justify the $45 billion market cap Twitter had at its peak in December or even the $25 billion valuation it had after going public.

Bhatia notes that LinkedIn, which has 300 million users and is expected to top $2 billion in revenue this year, currently has a market cap of about $18 billion.

As a result, Twitter the stock might be in for a rocky ride as investors adjust their expectations. However, Twitter the service is still healthy and has plenty of potential.

“Twitter as a platform, we believe, is already incredibly mainstream,” Dick Costolo, Twitter’s CEO, said during the earnings call. “Now what we need to do is help that world of users who already experience Twitter every day understand the value, the increased value of the log-in experience.”

When asked to clarify in later interview what he meant by “mainstream,” Costolo said that the social network is “already embedded in the culture.”

It’s a form of spin, to be sure, but it speaks to an important asset for the company: The awareness of Twitter far exceeds the number of users who actually log onto the social network each month. The social network is used by countless influencers and content from Twitter appears on television, in print and on various websites.

The challenge, and perhaps the opportunity, is to convert mainstream awareness into mainstream adoption. Part of that effort will require improving and simplifying the onboarding process, something Twitter is already said to be working on. But another part of it arguably requires thinking less about the “log-in experience” and more about the experience of being a passive consumer.

As Brian Wieser, an analyst with Pivotal Research, put it to Mashable in an earlier interview, “Most people don’t tweet… Most people will probably never tweet.”

For that reason, Twitter might do better to take a page from YouTube, another service with more than one billion users. Many people will never upload a YouTube video, or only do so on rare occasions, but anyone can browse the videos on the site with or without an account, letting YouTube earn ad revenue in the process.

Rather than just display a generic Log In page when users open up the website or app, Twitter could display a page curating interesting tweets and accounts. Users would not need to sign up to browse through these curated feeds, but they would be prompted to create accounts if they wanted to engage with that content. In that way, Twitter might just manage to convert some of that mainstream awareness into greater adoption.

PHOTO: Twitter goes public at the New York Stock Exchange on Nov. 7, 2013.IMAGE: MASHABLE/CHRISTINA ASCANI