Twitter (TWTR, Financial) has lost nearly a third of its valuation in the last 12 months, but, despite the stock trading way off from its 2014 peak of near $70, the stock still looks a bit pricey. Twitter is now trading at nearly five times its sales, a level often associated with hyper-growth companies that can keep posting strong top-line growth numbers. At the current price-sales ratio, Twitter has to keep moving the top line needle steadily upward in the next few years - something the company has been struggling to do.
In recent weeks, it has become clear that a buyout by a tech major remains a pipe dream for Twitter. The stock price surged in October as speculation about a possible sale was rife in the market. Unfortunately, company after company walked away from the negotiation table. Although the reasons for no buyer are still not clear, what is clear is Twitter, at least for now, has its fate in its own hands.
Are their consistent losses responsible for dwindling market cap?
The current market and investors are not the traditional old-school type where everything is seen from the earnings angle. The days of profit margins being more important than the top line are gone. Facebook (FB, Financial) has always been treated well by investors, even when they had only top line to show. Amazon (AMZN, Financial) has always taken the “cash flow is what matters” approach. Then there is Tesla (TSLA, Financial). Agreed, these are top companies, but the point is, if the company can show meaningful growth - be that in terms of user base or top-line numbers - the market is more than willing to overlook the lack of profits.
What I am driving at is that Twitter still not making any money (the company is still posting losses since going public in 2013) is not at all the reason behind its dwindling valuation. The problem is its user base growth, which has looks nearly static when you compare it with its chief competitor, Facebook. This is the biggest problem that Twitter faces and unless it finds a solution, the going will only get tougher for the company.
Where does Twitter stand now?
At the end of third quarter, Twitter had 317 million monthly active users compared to Facebook’s 1.788 billion. In fact, even Facebook’s daily active users, who exclusively accessed the platform through mobile devices, crossed 1 billion during the third quarter. So, clearly, Twitter’s numbers pale in comparison to Facebook’s. To further exacerbate the problem, as a smaller company, Twitter should be able to expand faster but, unfortunately, the much bigger Facebook keeps growing at a faster rate. During the most recent quarter, Twitter’s user base grew by 3% year over year compared to Facebook’s 16%.
A sub-5% growth rate as the second best social media platform is definitely not where you want to be when the entire world is a potential market. Just taking things from Facebook numbers, it is obvious that that are more than 1.179 billion users around the world who are actively using the Facebook platform on a daily basis. This is the market that Twitter could or should have gotten closer to.
One could easily argue that Twitter is a bit more high-end or intellectual than Facebook. Even if that were true, Twitter should have been able to get closer to or above Facebook’s overall monthly active user base. Facebook’s MAU in the United States and Canada is 229 million. During the third quarter, Facebook added 12 million users in this region, a growth of 5.52% year over year. This is a little better than what Twitter was able to gain during the same period all over the world.
Can Twitter win despite slow user growth?
An increase of a mere 6.7 million users in the world’s top market, which is the seventh best in the world in terms of literacy rate, and where internet penetration is around 90%, shows that people who could easily use the Twitter platform are just not using it. Normally, that might not be a bad thing. After all, Apple’s iOS has a significatnlty smaller user base compared to Google’s Android, but the positioning of Twitter versus Facebook is not the same as Apple’s high-end phones versus Android devices.
If Twitter had that kind of positioning, the amount of money advertisers would have paid the company would have been much higher but, unfortunately, Twitter falls short of Facebook on that metric as well. Twitter’s total revenue for the quarter was $545 million with a monthly active user base of 317 million, compared to Facebook’s advertising revenue of $6.816 billion with a monthly active user base of 1.788 billion. It is obvious that Twitter’s ARPU (average revenue per user) is much lower than Facebook’s.
Advertisers appear to prefer pouring their money into Facebook, which that does not fit in with the argument that Twitter has more loyal and engaged users but a smaller user base. So, if we cannot use a product company comparison such as Apple-Google for the Twitter-Facebook relationship, then the only solution for Twitter’s problem lies in their user base growth in the United States. If they cannot show growth in their home country, things are going to get tighter and tighter for them in the future.
That is essentially the investment thesis as well. Wait for user growth to improve in the U.S. market or do not invest at all. That is their last bastion of hope and if they cannot show progress there, your money is not going to give you any kind of significant returns no matter how long it takes. There is one sliver of a chance that their live sports video will make gains over time, but it is far too early to even begin discussing it at this point.
For now, the high valuation is not borne out by any of the growth metrics that Twitter has been publishing.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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