Twitter (TWTR, Financial) went public on Nov. 7, 2013, pricing its offer at $26 per share, and saw the stock close at $44.90 on its first trading day.
For the next few months Twitter’s stock price kept moving up and reached an all-time high of $74.73 on Dec. 26, 2013, a level to which the company never again came close. The stock is now trading under $20, way below its IPO price with recovery still many years away.
Can Twitter break out of this downward trend that has lasted three years? In an earlier article called Is This Twitter’s Last Lifeline? I covered its live video streaming initiatives and how that could be the one thing that saved the day for the company. But engagement is just the surface of the problem. The real problem is with its slow user base growth. Will the video push be able to tackle that basic problem as well? Let’s take a look.
The competition
In any industry, the competitive landscape is what decides your position. If you can stand out from the competition with a viable differentiator, your business is as secure as it gets. If not, you can still survive as a player in a crowded market if you are at least marking profits and keeping your cash flow growing.
When you don't have either of those you’re in deep trouble. Unfortunately, Twitter does not stand out – at least from an advertiser’s perspective – as a platform to advertise on. In other words, Twitter is just a choice, not the choice.Facebook (FB, Financial) has that privilege as does Google with its massive global network.
The money factor
To compound that market position problem, Twitter has been bleeding money. It’s a vicious cycle that contributes from both ends: The platform does not stand out so engagment drops, leading to low user growth and advertisers staying away or asking for huge discounts to get on board, thereby eating away at the bottom line. As a result there is less money to invest in the core business, and low investment capability inevitably leads to low user growth. That’s the cycle that Twitter has been caught in ever since its all-time high.
To further complicate the matter, the success that Facebook been enjoying during that time has exacerbated this problem for Twitter, and this cycle is not something from which it is easy to break out. The first thing that Twitter needs to address is its user base. With just 310 million monthly active users on board Twitter’s user base is not growing fast enough; and, unfortunately, the company doesn't have another product to maximize its offering the way Facebook has Instagram.
The missed opportunities
Moving from 30 million users to 313 million in six years may be a mouth-watering prospect for a product company, but for a social media platform with global reach it’s a pittance. This is the most basic issue with which Twitter has to deal.
Facebook, on the other hand, was laser-focused on engagement from the beginning, and it left no stone unturned in looking for new opportunities. It kept focusing on advertiser growth, celebrated every milestone and made such a big deal out of it that success was almost inevitable. But it also focused on engagement on the user side of things, constantly upgrading its services, adding features and aggressively encouraging users to use them.
Twitter did little of that, and the state it's in is a direct result of that inaction. Moreover, it also seems to have missed the rapid growth of messaging apps, which Facebook quickly moved on by acquiring one of the world’s largest chat networks, WhatsApp.
The other opportunity that Twitter missed is user growth in its home region. Compared with Facebook’s 222 million North American users, Twitter only has 66 million in the most highly Internet-penetrated (90%) region in the world. As I explained in a recent article on Facebook, average revenue per user (ARPU) for social media sites is eight times higher in the U.S. than it is in Asia Pacific. Now, if Twitter can’t tap into that market, it’s going to be hard for it to see top line growth moving forward.
Can video help its user base growth?
Yes, it can. Twitter has a ton of inactive accounts that people have set up but have seldom used. If live streaming of sporting events from the NFL, NBA, collegiate athletics and other sources gets it the engagement it needs, it might “awaken” those sleeping accounts, and we could see some significant user growth within North America over the next several quarters.
The one big advantage it has with streaming live sports is that users can comment live as the event is being broadcast. Facebook Live is capable of that as well, but Facebook hasn’t had much success signing up major sporting bodies because of its aggressive negotiation methods.
The fact that Facebook has effectively alienated the NFL could be just the opportunity that Twitter has been waiting for. With the NFL promoting Twitter as the place to be when watching live streaming, Twitter could have an easy time of beating Facebook at its own game.
What’s more, Twitter recently signed a deal to feature its broadcasts on Apple (AAPL, Financial) TV, giving it an additional user base in an indirect way. Apple TV itself is relatively newm but it has a massive and loyal consumer base around the world so we could see this synergy working out to their mutual benefit.
Another major opportunity is its recent investment of $70 million in SoundCloud, the audio streaming portal with over 175 million active monthly users. If it can find a way to synergize that relationship as well, Twitter will find itself squarely in the path of streaming audio and video – and on the path to growing its user base at a faster pace than ever before.
But all of this relies on Twitter moving fast and getting its streaming projects executed without a hitch. If itcan do that, we might see Twitter’s stock attain loftier levels. Until then, it’s a clear HOLD from me.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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