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This is How Twitter Wins or Goes to Zero. Period.



Twitter (TWTR) has the opportunity and capacity to become the next revolution in communication, following in the footsteps of the Telegraph and the Telephone. It also faces existential risk if that opportunity is not realized. There is a non-trivial possibility that the firm, for all intents and purposes, goes away if it does not capitalize on its core competency and changes the application to alienate its current user base of nearly 1/3 of a billion people a month. I note that the option market pricing for the January 2017 straddle reflects a bottom range of ~$13 per share.

Two weeks ago, on Canada's largest network television station, I presented an impassioned argument that addressed Twitter's future and its founder, Jack Dorsey and explained this very reality. Here is that interview link:

Video: The Most Compelling Bullish Argument on Planet Earth and Dire Consequences if it’s Missed

Quick History
In the latest earnings release Twitter showed strong revenue growth, beating estimates handily (well done, Adam Bain). The stock however, collapsed. CEO Jack Dorsey and CFO Anthony Noto both lamented the lack of user growth and used language that crushed the stock after hours. It is a fact that logged in user growth has all but stopped, entirely. I do note that 8 million non-logged in users (SMS/Text users) were added during the period. Keep that in mind as we move forward.

Before we do more analysis, let's take a breather and look at a chart. We plot Twitter's revenue (TTM) in the blue bars and its price to sales in the orange line.

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We can see revenue (TTM) is up 83% while price to sales has collapsed nearly 50% (because the stock is down over 30% in the last year).

The stock market is neither deaf, dumb nor stupid. The price decline in the face of massive revenue growth is not a mistake; rather it's a reflection of that existential threat to Twitter as a company.

To give some context to Twitter's revenue growth, here is a scatter plot which plots revenue (TTM), 1-year growth on the y-axis, and equal spaces (ranks) all technology firms above $18 billion in market cap.

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Let us not miss the dual realities that TWTR is growing faster than all but one firm in technology of relevant size (market cap > $18 billion) and that the firm is not growing users.

Or is the firm growing users?...

An online advertiser has to do at least one of three things to be successful: (1) Have appropriate content, (2) be timely, or (3) have a broad audience.

Google is by far the most successful advertising company in the world, generating nearly $55 billion in ad revenue (out of a total of $70 billion firm wide). When someone clicks the "search" button on Google, she automatically gets appropriate content, timeliness (it's immediate) and Google reaches an enormous audience. Game, set and match. That advantage is worth about half a trillion dollars (Google's market cap).

Facebook (FB)
While Facebook (FB) doesn't do timeliness very well, it collects so much information on its users, we might as well call it the human genome project, ex-biological matter. That means Facebook (FB) ads are content rich, and at a daily reach of of 960 million users, the audience is very broad.

So where does that leave Twitter? The firm does not have as much information on its users, so content richness is weaker than the two behemoths. The firm does not have anything near the broad audience that Facebook (FB) and Google (GOOGL) have. But there is one thing... TIMELINESS. Twitter is the real time machine and that gives it a compelling and differentiated product for its users and therefore for its advertisers. Project Lighting was Jack Dorsey's (prior CEO) brain child and it focused on live events and bypasses the need for new users to even log into to Twitter to participate in the social discussion of live events. It's brilliantly aimed at strengthening and taking advantage of Twitter's competitive advantage.

There are scores of data pointing to Twitter engagement surrounding events whether they be sporting events, political events, geo-political happenings or entertainment events outside of sports. Like, there were 25.1M total tweets and 9.1B impressions globally surrounding the NCAA tournament last year (Source: Twitter to me in an e-mail). Twitter simply works with real-time delivery. Think of every event possible -- is it even a question that the firm could grow users by tens of millions per quarter? OK, let's say it is a question.

Let us now recall that 8 million new users reported in the last earnings call that were "non-logged in" users (SMS in this case). We have circumstantial if not empirical evidence that non-logged in users can and will participate on the Twitter platform. And Project Lightning hasn't even been released yet.

Interestingly, it's possible, if not likely, that non-logged in user growth could expand rapidly once Project Lighting is released and the delineation between these two types of users could become less important.

If Twitter and Jack Dorsey focus on Twitter's compelling and differentiated advantage of real-time events, it will succeed as the next great communication invention in the world.

Prior CEO Dick Costello did something else rather compelling, before he left. He bought Periscope, a live streaming video social media product, even before the company launched itself. Live video streams on social media (aka periscope) are exactly aimed toward Twitter's core competency and differentiation. For our final visualizations, I present some data. Here are two breathtaking charts illustrating Periscope growth. The first shows daily active users, and the second shows the amount of video watched per day. Note that Periscope just announced hitting 10 million users.

It's Execute or Die
These next quarters (or less) are Twitter's last chance to get this right. It was Facebook (FB), not Twitter, that sponsored the GOP presidential primary debate in real-time. It was Facebook that has announced a new product very similar to Twitter's real-time feed. Listen; Facebook (or some other firm) will destroy Twitter if the company does not immediately turn to real-time events in general (and Project Lightning in specific). If Twitter pivots away from its core users, changes its timeline and real-time delivery, and does not get on board with Lighting, it will go away. And, again, I remind everyone, the stock market (globally) is an event that happens everyday and exemplifies Twitter's real-time differentiation.

Hey, Twitter, don't change. Do what you have already planned. Don't pivot.

Now is the time for Twitter. Now is the time for Jack Dorsey and Adam Bain (who should likely be promoted to CEO).

Twitter will either become the revolution in communications and garner a following well over half a billion people, or it will get left behind, entirely.