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Fundamentals

Written by Ophir Gottlieb, 12-31-2015
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PREFACE
While Twitter appears to be the most hated stock in technology, now may be time to see the forest for the trees. This could easily be a to performer in 2016 and on the verge of massive turnaround.


Certainly, as of right now, Twitter's net income (aka after tax earnings) is atrocious. Here's a chart with Twitter's all-time history.



We're looking at a loss of about $550 million in the trailing-twelve-months (TTM). Even worse is the lack of user growth which has stunned Wall St. for the last several quarters.

But friends, when I say all hope isn't lost, I mean in a big way. Enterprise changing news came out in December and the market just hasn't caught on yet.

HUGE NEWS #1
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 in just the month of December:

News broke in December 28th about a meaningful partnership in India.

Yes, we're talking about payments and transactions, but there's more. Twitter is also providing free delivery during the holiday season. As of this writing, the service has been rolled out to Delhi, Bangalore, Mumbai and Pune.

This comes on the heels of a collaboration with Indian communications provider Reliance Mobile. "The entities have together launched #SmartCare on Twitter which will enable users to manage their mobile accounts. In fact, users will have to just tweet to perform everyday tasks like bill payment, recharge, information about best deals and tracking both voice and data usage" (Source: ZACKS).

WHY DOES INDIA MATTER?
India represents the third-largest Internet user base after China and the U.S. It's easily Facebook's second largest market at 125 million users. Here's a chart of India's expected social media growth.



According to Forbes, the number of Internet users in the country is more than 400 million.

HUGE NEWS #2
The news that broke on December 10th may even be bigger, as management appears to finally be moving the company in the direction of growth. Here's what we learned:


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 December 10th 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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NOW WHAT?
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.

Remember that net income down trend we looked at to start this research dossier? An additional $1.5B in potential revenue flips that trend around, and it does it quickly.

Further, months ago, Twitter came to an agreement with Google where tweets now show up in Google searches. This has tripled Twitter's audience 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?
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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CONCLUSION
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. 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. The tone must change when we address it as a company with 820 million users. Or, even more, as a firm with a footprint in India and a billion total users integrated with one of the largest communications companies.

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.



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 is 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 we now have empirical evidence that 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 in early December is an enterprise changing move that gives the company cash flow, and perhaps even profitability within a year. Further, the international in roads made in India present another hidden growth gem even if state side growth stagnates. That's the thesis if you're a bull. It's that simple.

The top 1% of wealth owners in the United States and their hedge fund managers are keenly aware of the trends, data and groundwork happening for every firm. Data and research 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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As of this writing I am long call options in Twitter and my household is long Twitter stock.