Twitter Inc. (TWTR) is a global Internet platform that connects users posting publicly visible, real-time short messages, creating a network of people, information, news, ideas and opinions. With currently more than 240 million monthly active users (MAUs), who generate approximately 500 million tweets every day, Twitter is available on desktop and mobile devices including Android, iOS and Blackberry. Its asymmetric follow model in which users to be followed by others without a reciprocal relationship, allows a constant flux of information from personalities such as politicians or celebrities and enables users to keep track of content in which they are interested.
Twitter’s network is regarded as the largest real time social network in the world, and its users benefit from the broad content distribution within its platform. And still, users have highly personalized experiences within the network, creating and sharing content. Naturally, advertisers find these social network platforms especially attractive for their activity: nearly 90% of Twitter’s revenues are generated from advertising. The other segment from which the company reports revenue is data licensing, accounting for around 10% of total revenues. Indeed other social networks such as Facebook, Inc. (FB) present a significant competition in attracting advertising revenues; therefore the company needs to keep its product attractive as to sustain growth. Nevertheless, Twitter complements traditional content and media and thus provides the company hot content which flows through its media platform at a cheap price.
The firm’s fourth quarter results were a bit too disappointing, as the adjusted loss fell far behind estimated numbers. Still, during this period Twitter reported more than 150 billion "timeline views" -Twitter’s measure of the frequency at which users are reading tweets- growing 26% year over year, and MAUs increased 30% from the same period. However, this might not be enough to create massive competitive advantages.
Twitter has come certainly to be regarded as one of the top social network companies in the market, but more precisely, as a complementary information source for users. The company’s platform keeps attracting users and therefore increasing both its real-time content and user data base. Moreover, the fact that mobile usage of this platform has been increasing points towards a solid positioning of the company within the market as well as a positive outlook for its top-line growth in the near term, as a surge in the mobile user base drives advertising revenue. Global mobile ad-spending is expected to climb 75.1% to $31.45 billion in 2014.
Keeping its product portfolio is essential as to continue attracting advertisers, especially with the fierce competition posed by Facebook, Inc. (FB) and Google, Inc. (GOOG). Looking to improve user’s engagement, the company has expanded offerings with media forward timeline, inline social actions, Twitter Alerts and Custom timelines. It recently rolled out a new look that some think might be too similar to Facebook’s timeline, with customizable user profiles, with headers akin to the Cover Photos feature in Facebook. Nevertheless, the two platforms have different targets, as Twitter intends to go beyond providing news and public information. Moreover, users will be able to "pin" one of their tweets to the top of the page to show the topics they prefer to tweet about. The company wrote in a blog post this week: "Moment by moment, your Twitter profile shows the world who you are."
Likewise the company has added features that allow users to send and receive photos via direct messaging and swipe between timelines. The new pop-up notifications on its website will allow users to see interactions, replies, favorites and retweets. These efforts have resulted in increased messaging of 25.0% year over year basis. New releases also include products such as TV Conversation Targeting, Tailored Audiences, Conversion Tracking and Promoted Accounts in Timeline, innovations that point at increasing advertisers return on investments, stimulating further investment. On top of that it has recently added 19 new languages in its Vine mobile app, on both iOS and Android platform. There is no doubt expanding into the mobile world is crucial for company’s growth.
Acquisitions are always regarded as a good move towards growth, especially small acquisitions that fit overall business mix and don’t involve heavy integration costs. Twitter has no doubt engaged in this strategy and acquired around 25 companies which expanded its technology and infrastructure base. Acquired companies such as TweetDeck, Dasient, Crashlytics, Bluefin Labs and MoPub have allowed Twitter to expand its product portfolio, and recently bought Mesagraph and SecondSync, are expected to help it enter European TV analytics market. International expansion is also in scope, as user growth has increased its pace in markets such as France, Japan, Russia, South Africa and Argentina.
Risks and Threats
Twitter has nevertheless remained a niche product, and hasn’t grown into the mainstream Internet population. Therefore, the company faces some uncertainty regarding advertising revenues. And moreover, the fact that its main source of revenue is advertising implies a major risk for the company. Competition is a high hindrance for Twitter, and increased popularity of networks such as Google Plus, Weibo, LINE, Kakao, and of course Facebook place some serious concern.
As far as profitability is concern, the company has been accumulating a deficit that has reached the $994.6 million. Continued investment on product development might carry some costs that are likely to impact negatively on the company’s profitability. And although it has experienced quite an expansion in international markets such as Argentina, France or Russia, monetization level is expected to remain lower than the United States. Other markets such as Turkey, Iran, Libya, Pakistan and Syria have been barred for the company, as the utilization of Twitter platform as a medium of social protest has led political leaders to ban its usage.
The company has been having some hard time growing its user base and increasing advertising revenue. Although Twitter may be a fad, marketers still regard Facebook as a more attractive option. Twitter has to make its marketing platform cheaper and generate a more attractive revenue return. Nevertheless, Twitter’s ad revenue per user is growing and the recent development of new products and enhancement of its platform are likely to lure even more users. Twitter is expected to post a profit of $0.06 by the fourth quarter while top line estimates have the company posting profits in all four quarters this year.
Still, Twitter relies on its advertising revenue source, and therefore is vulnerable to any fluctuation in advertising levels. A recent increase in mobile advertising, although regarded as being far less profitable, might be presenting a new growth opportunity. It shows no signs of easing, and this intensified presence might lead advertisers to evaluate an increased investment in the segment.
Despite recent weakness in the stock, Twitter is firmly installed within the market, and is likely to stay as such. Nevertheless, the stock might not be as interesting as others, with greater growth opportunities, but might still leave investors a significant profit. Now there's no denying the recent weakness in the stock or possibilities shares retest or perhaps fall slightly below their all-time low of $38.80. However, as LinkedIn continues to trade with a P/E ratio over 750 and Facebook shares continue to sell for triple the price they went for only 17 months ago, one thing remains clear. That is the fact the risk appetite remains strong. Twitter surely isn't a safe haven, but it can still leave investors with a significant profit.
Disclosure: Damina Illia holds no position in any of the stocks mentioned.