FundamentalsWritten by Ophir Gottlieb, 12-11-2015
While Twitter appears to be the most hated stock in technology, now may be time to calm down, and see the forest for the trees. This could easily be a to performer in 2016.
News broke on December 10th that made Twitter massively compelling as management appears to finally be moving the company in the direction of growth.
Twitter stock has been getting crushed even as revenue is exploding higher for one very simple and reasonable explanation: user growth has all but stopped at 320 million monthly average users (MAUs). The thinking therefore is, that even as the company monetizes its base, that will reach a maximum point, and then we are left with stagnation. But, here's what we learned yesterday:
Twitter announced Thursday that it will start showing ads to its "logged out" audience, a group of roughly 500 million people who visit Twitter every month but who don't have active user accounts.
Twitter has long been telling us that the 320 million MAU number is vastly understating its user appeal. And by vastly, I mean, the number looks more like 800 million users. As of yesterday we now know that Twitter is going to start monetizing this base. Here's the all-time revenue chart, which still looks magnificent and does not include the new strategy.
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Note that while user growth has all but stopped, the monetization of its user base is exploding. In fact let's plot revenue growth in the last year on the y-axis and rank Twitter, Facebook and LinkedIn on the x-axis.
Even with stagnated user growth, in the context of its two closest competitors, revenue growth is booming. So what does this new strategy potentially add to Twitter? A lot.
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On Twitter's last earnings call, COO and head of revenue, Adam Bain, said that the company believes these ads will monetize at about half the rate of usual Twitter ads (Source: re/code).
So, let's put some math in here. If 320 million users have generated about $2 billion in sales and growing rapidly, then 500 million more users at half the revenue pace would mean an additional $1.5 billion in revenue. Yes, that's 75% more revenue essentially turned on like a light switch.
As of right now, here is Twitter's ugly net income chart (aka after tax earnings).
As of now, we're look at a loss of about $550 million in the trailing-twelve-months (TTM). How does an extra $1.5 billion in future sales with no real change to the company's infrastructure make that number look? Let's just say, a lot better.
And there's more. Months ago, Twitter came 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 but no matter what, we know that non-logged in user growth will certainly rise.
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A VALUE PLAY?
Twitter has quickly become, in a really odd way since it's a company with negative earnings, a sort of value play. If we compare Twitter to Facebook and LinkedIn in terms of price to sales, we'll find something else stunning.
Even though Twitter is growing revenue faster than its social media peers, it has the lowest valuation as measured by price to sales. And again, none of these charts have been impacted by this potentially massive new revenue source just announced yesterday.
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I've written it and said it on TV several times ad nauseaum, but it's simply true: There's a window for Twitter to follow in the footsteps of the Telegraph and the Telephone as the next major step forward in communications. It can be the end-all-be-all of real-time communications on a global scale.
But, Twitter also faces existential risk if that opportunity is not realized. Competitors are 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 in serious trouble.
Facebook has 1.55 billion monthly average users and just crossed 1 billion daily active users. 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 competitor to Periscope), Snapchat, and many, many others.
But, that was the thought process when we considered Twitter as a social media company with 320 million users. How does it look with 820 million users? Keep in mind, gross profit growth at Twitter, when compared to all technology companies with market caps between $15B and $30B is already extremely high. This time we will equal space the x-axis(rank) and plot gross profit on-year growth on the y-axis.
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Twitter is in fact growing its gross profit faster than every technology company in this peer group. Again, let us understand the difference between user growth and revenue growth.
Twitter must see a jump in user growth from 'Moments,' Google search and Periscope (or some combination), even if it's just circumstantial. Moments of course is brilliantly aimed at pushing Twitter's only truly differentiated core competency forward -- timely delivery of information and news.
We know the argument for Periscope, which is simply that mobile video is crushing it and found out that large advertisers are happy to work within the confines of unscripted live feedback as long as they can reach millenials. And finally, now that tweets are indexed in Google search, triple in the number of people getting exposed to Twitter. The hope is that user growth will reignite.
But, the monetization of 500 million more users that was announced yesterday is a huge move that gives the company cash flow, and perhaps even profitability within a year. The investment thesis for Twitter has abruptly changed over night. Further, we have news that Twitter is making waves in India, the second largest single country market for social media (Facebook has 125 million users there).
Data like this, until now, has been kept away from retail investors, especially in a format that's so easy and so fast to digest. The information asymmetry that exists between pros and non-pros has transferred massive wealth to the top 1% from the rest of us. That information asymmetry is no longer acceptable to us.
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