Twitter is the most unique of all the social networks and provides the most value. Its product helps to disseminate breaking news and offers creators the ability to build an audience. It’s also the only social network where you can realistically make a connection with high profile users and celebrities.
Recently, Twitter announced a number of new products designed to enrich user experience and grow revenue. Twitter Blue, Super Follows, Spaces and Tip Jar are all smart ideas for monetizing existing users and indicate the direction that Twitter wants to go.
Twitter Blue, for example, gives users a new reader mode, the ability to undo tweets, and folders to arrange bookmarks. At $4 a month, the service could add an extra $960 million annual revenue assuming a take-up of 10% from the existing userbase.
Aside from new services, Twitter is improving its advertising tools. Topics allows Twitter to gather more precise data on user preferences. Geotargeting allows advertisers to hone in on specific areas. New ad types like carousels and video should also boost conversions.
Competitive Advantages
In terms of moat, Twitter has several competitive pillars working in its favor. First, the company has a strong brand that has rooted itself in the modern lexicon. Everyone has heard of Twitter and everyone knows what it means to ‘tweet’.
Second, Twitter possesses network effects. The more users that join the product the stronger the product becomes. (Although some critics might disagree on that).
Third, Twitter is an addictive product that ensnares users with psychological hooks. Social media can be compared to the tobacco industry which has produced some of the best performing companies of the last 40 years.
It’s worth noting that Facebook possesses all of the same pillars. However, Facebook is now a trillion dollar company and Twitter only $50 billion. The valuation gap stems from the fact Twitter has fewer users (though not 20 times fewer) and fewer revenue streams. Meanwhile, Snapchat trading at 34 times revenue, is worth $114 billion despite having 25% less TTM revenue than Twitter.
Moreover, Twitter has the advantage of being better positioned for the future of the internet. By tapping into the creator economy, Twitter will allow users to monetize their followings. This will not only drive revenues, it will also bring new users to the platform.
The New Way
Consumers have always found new ways to circumvent advertising tricks and this unavoidable fact will eventually impact current advertising giants like Facebook. The future increasingly belongs not to advertisers but companies that enable creators to monetize their followings with their own services and niche communities.
Twitter also offers an indirect play on web 3.0, a term that loosely encompasses the movement towards a decentralized internet including blockchain, NFTs and cryptocurrencies. Anyone who browses Twitter for a short time will find a burgeoning community of blockchain enthusiasts and NFT creators thriving on the platform.
Whether or not you believe in these trends, there is no doubt that Twitter has become more relevant over the last couple of years. It’s use of AI and machine learning has improved discoverability on its platform and the quality of content has improved as a result.
There are three trends relevant to Twitter and you, our shareholders: AI, decentralization and the Internet finally having access to a global native currency in Bitcoin.
~ Jack Dorsey, recent earnings call.
Risks
Despite the bull case, there are plenty of risks to be aware of. Perhaps the greatest is that the company fails to meet investor expectations. At 10 times revenue, the company is priced near the top of its historical range.
If the company grows revenues at a rate of 15% annually over the next 10 years and is then priced at 5 times revenue the expected annual return to an investor at today’s prices would be only 7% per annum. Twitter therefore needs to grow closer to the 20% range in order to provide a satisfactory return to shareholders.
Twitter is also spending reasonably heavily on R&D and new hires. Total costs and expenses are expected to grow 30% this year and the company has over 700 new job openings according to Twitter Careers. Paying new employees will eat into profits and this will contribute to investor disappointment if revenue fails to grow as expected.
Additional concern is the recent flat-lining of user growth in the US. While total monetizable daily users were up 11% to 206 million in Q2, users from the US actually dropped from 38 million in Q1 to 37 million in Q2. Twitter really needs to maintain user growth and revenue growth in order to support the valuation.
What’s Going On?
Twitter has become the most relevant social media platform and possesses key competitive pillars. Even so, there are questions on how well the company can meet investor expectations. Historically, monetization has been slow and Twitter has been criticized for not capturing enough value. However, slowness is not necessarily a bad thing if it is deliberate and adds value over time.
I’m not wildly bullish but I think Twitter is a reasonable buy. The stock feels like a 2x or 3x with a slim chance of a 10x (many years out) if the company becomes a leader in web 3.0. For that reason I have purchased a small position that I intend to hold long-term.
Conviction: Low/Medium
Thank you for reading Unexpected Value.
Disclosure: I/we are long TWTR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst and does not purport to tell or suggest which securities customers should buy or sell for themselves. The reader agrees to assume all risk resulting from the application of any of the information provided. We strive to provide accurate data and analysis, however, mistakes and errors do occur. Financial investing is risky and not for everyone. You should not bet more than you can afford to lose. Past performance is not indicative of future results.