Twitter Inc

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On the Brink: Twitter Changes the World or Goes to Zero. Period.

Fundamentals     

Written by Ophir Gottlieb, 10-21-2015

Twitter is on the precipice of creating perhaps the only truly revolutionary communication technology in the last decade, or getting beaten to death by rivals. At the end of this note we will know how Twitter wins, or goes to zero. And it's not what Wall St. is looking at. Period.

There's a window for Twitter to become the next revolution in communication, following in the footsteps of the Telegraph and the Telephone. The Arab Spring, Ferguson (Missouri) and almost every other major political or world changing event has been broadcast live by Twitter users, press and non-press alike. It is the end-all-be-all of real-time communications on a global scale. The social connector. That's the opportunity and we will know which way the scales lean on October 27th, after the market closes, when Twitter reports earnings.

But, Twitter 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 ~$15 per share.



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.



We can see revenue (TTM) is up 83% while price to sales has collapsed nearly 50% (because the stock is down over 40% 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 an existential threat to Twitter as a company.




What's Going On
For several months the company was sort of drifting in the wind without a permanent CEO. The board eventually gave in amidst pressures from several people, including famed investor Chris Sacca, and allowed Jack Dorsey, Twitter's co-founder and original CEO, to be named permanent CEO while also heading Square into its IPO. One of Jack's first moves has been to trim 8% of Twitter's staff with 336 layoffs.

While no one likes to see jobs lost, this was a badly needed move. Here is a chart from Statista showing the absurd employee growth in Twitter over the last few years.



But we all know that's not what's happening... What's really happening is that Twitter's user growth all but stopped based on last quarter's earnings release and CEO Jack Dorsey and CFO Anthony Noto both lamented the lack of growth so grandly that they crushed the stock price after hours.



The Opportunity
Here it is. Plain as can be. Twitter needs more users, and for now, the product is seen by many as too complicated. Here's how Twitter aims to fix it.

First, 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).

Prior CEO Dick Costello headed a wonderful idea originally called Project Lightning, which is now apparently called Twitter Moments (with a lightning bolt as an avatar). The concept is simply this: As the real-time connector of humanity, now Twitter can be driven by events as they occur so both logged in and non-logged in users can participate in the social discussion in real-time, together.

This is brilliantly aimed at pushing Twitter's only truly differentiated core competency forward. Google and Facebook, though mammoth's, just don't have this. Period. Soon (now?), a non-logged in Twitter user can hop onto the app and participate in discussions of anything, like a presidential debate, a football game or a mega-world changing event, like Syria and Russia.

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Second, Twitter is compounding its focus on real-time with Periscope. 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.

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.





Even further, App Annie data shows us that Periscope is now the 8th most downloaded social networking app on iOS (iPhones) and is the 43rd most downloaded app in total. Periscope is working and don't worry about monetization, Adam Bain (COO) will figure that out.

Third, Twitter has come to an agreement with Google where tweets now show up in Google searches. This broadens Twitter's audience by about 3-fold and early numbers show that tweets appear in over 90% of desktop and mobile Google searches, already. With a triple in the number of people getting exposed to Twitter, the hope is that user growth will reignite.

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Now What?
As we saw above revenue growth isn't the issue. Adam Bain, newly promoted from Chief Revenue Officer to COO, has absolutely crushed the monetization part of the Twitter. He and his team have created revenue and continue to grow it leaps and bounds faster than user growth. This is not the issue.

The issue is whether or not Jack Dorsey will change Twitter (called a 'pivot' in tech Silicon Valley speak) to try to get new users, or of he will keep Twitter as is, but allow the opening of Moments (Lightning), Periscope and Google search to bring users. If Jack changes Twitter and alienates the 316 million monthly average users, the company could very well go away.

On July 31st, 2015, 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


Keep in mind that Twitter has competitors on its heels. Regardless of what the tweeps think about Facebook, if Mark Zuckerberg turns his attention to real-time communicase before Twitter masters it (and then owns it), friends Twitter is done. Facebook has 1.5 billion monthly average users and just crossed 1 billion daily active users a few weeks ago. And let us not forget about other social media platforms getting awfully close to the real-time event driven mastery. We're talking about Meerkat (a direct competior to Periscope), Snapchat, and many, many others.

Twitter must see a jump in user growth from 'Moments,' Google search and Pericope, even if it's just circumstantial. That's what we need to watch on earnings. Forget the top line numbers that Wall St. will pump out. That's noise. It's do or die for Twitter... and that's just it.

I remind all readers of the article published on August 31st, 2015:
Google or Facebook Will Buy Twitter. Soon.