Could Twitter Finally Be on the Verge of a Turnaround?

The signs are good, but investors need to proceed with caution and watch key metrics

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May 30, 2017
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After several quarters of disappointing user growth metrics, Twitter (TWTR, Financial) roared back to life adding 9 million monthly active users during the first quarter of 2017, of which 3 million users were added in the U.S. alone.

User growth rate has been accelerating steadily for the past five quarters, which is the clearest indication that Twitter’s recent efforts at increasing user engagement are being received by social media users around the world.

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As the second-largest social media platform in the world, comparisons with Facebook (FB, Financial) are unavoidable. On the monthly active user base front, Facebook (1.936 billion) is nearly six times bigger than Twitter (328 million). But Facebook had $8.032 billion in revenues during the recent quarter compared to Twitter’s $548 million, nearly 14.6 times.

The yawning gap is because, when it comes to advertising, scale matters; and it matters even more when you are a social media company. With its large and fast-growing user base, Facebook has already positioned itself as a company that you cannot ignore as an advertiser while Twitter becomes merely an option to try.

To compound its problems, Twitter’s user base wasn’t growing as fast as Facebook’s, which made Facebook even more valuable to advertisers. You want to be on the platform that is growing by leaps and bounds and also provides an opportunity to reach a wider audience. Growth rate is the clearest indication of demand and value for the platform in the eyes of advertisers, and we cannot fault them for picking the platform that has more demand in the market. This drives more advertisers toward the platform and increases competition for ad inventory which, in turn, pushes the revenue earned per user to a higher level.

The current disparity of Facebook’s average revenue per user versus Twitter’s will not go away that easily. But if Twitter is able to keep increasing its user base at a steady rate, we should be able to see that gap slowly narrowing over the years. But it’s far too early to announce that Twitter is back on track. The efforts to increase user engagement, including the push into livestreaming video, has helped Twitter immensely, but the company still has plenty of ground to cover.

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Twitter’s current level of penetration in its home market is a matter of huge concern. Twitter has 70 million users in the U.S., where more than 200 million people use smartphones, nearly 50 million have a subscription to Netflix and more than half the population uses Facebook. The first step for Twitter should be keep its user base growing in the U.S. and, until that happens over several quarters, it will be very difficult to recommend the stock.

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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