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No Compelling Strategy Emerging From Twitter Yet

Posted on Tuesday, Nov 11th 2014

Twitter (NYSE: TWTR) took its time in going public as it evaluated the market conditions and kept delaying their IPO till they thought the market was strong enough to handle their listing. The stock had a good run in the first few months of listing. A year since it went public, it is a different story. As growth in operational metrics slows down, the market is looking for Twitter to deliver Facebook-like monetization strategies. But for now, it appears to be a long wait ahead as models now suggest that the company may turn profitable only in 2017 and not in 2015, as projected during the IPO.

Twitter is said to suffer from a lack of vision and their inability to take a concrete stand on monetization opportunities. As Walter Price, a senior portfolio manager of Allianz Global’s Technology Fund puts it,

 “When you talk to them, I think they understand the problem, but they’re afraid of alienating [those who tweet]. It’s like this tension within the company in terms of what they want to be and how they want to do things. It hasn’t been resolved.”

Twitter’s Financials
Twitter recently reported their third quarter financials and though the numbers were ahead of market’s expectations, they weren’t really spectacular. Revenues grew 114% over the year to $361 million and losses more than doubled to $175 million. They ended the quarter with an EPS of a penny. The market was looking for revenues of $351.6 million and an EPS of $0.01.

By segment, advertising revenues grew 109% to $320 million and mobile advertising accounted for 85% of these revenues. Data licensing and other revenues improved 171% to $41 million.

International markets brought in $121 million in revenues, growing 176% over the year.

User growth is slowing down as the company reported a 23% increase in user base to 284 million. A quarter ago, Twitter had reported a 24% growth over the year. Average mobile monthly active users accounted for 80% of their total user base. Twitter’s Timeline views improved 14% to 181 billion and advertising revenue per thousand timeline views grew 83% to $1.77.

For the current quarter, Twitter projected revenues of $440 million-$450 million, falling short of the Street’s forecast of $448 million. Twitter raised the year’s revenue forecast to $1.365 billion-$1.375 billion, above the market’s projections of $1.362 billion. They forecast an EBITDA of $260 million-$265 million, which was also above the Street’s consensus of $245 million.

Twitter’s Troubles and Expansion Plans
Twitter’s biggest problem is that of a slowing growth in user base. While Twitter is no Facebook, it is interesting to note that Twitter’s growth is slowing down when they are at 284 million users. Facebook is also seeing a slowdown, but it has more than 1.3 billion users worldwide. Even when not compared to Facebook, it is worth noting that Twitter had earlier projected to end 2013 with over 400 million users and as it nears the end of 2014, they aren’t anywhere close to that number. Part of the reason for the slowdown is attributed to Twitter’s user interface, which isn’t simple enough to grasp for first-time users.

Twitter is slowly improving that. During the last quarter, they launched their biggest update to the profile experience on the iPhone by increasing focus on bios, tweets, and photos. They have made it simpler for users to get an insight into their contacts on Twitter. To improve user engagement, they also released a new camera for the Vine app that will simplify ways to edit and import videos to convert them to Vines.

The slowing user growth is also hurting growth in advertising revenues. According to eMarketer, Twitter’s ad revenues account for a modest 3% of the global mobile Internet market ad spend compared with Google’s 47% and Facebook’s 22%. Twitter has been rather slow in improving their ad monetization capabilities because they don’t want to upset their loyal user base by putting several ads on their screens.

As part of Twitter’s moves to improve advertising, they launched several new advertiser tools. For instance the Promoted Video option, currently in beta testing, enables streamlining of video playback and brings a one-tap viewing capability to their users’ timelines. They also tested a Buy button that lets users complete a purchase directly from a tweet. For more targeted advertising, they released tailored audience features that include audience list upload capability, improved audience management tools and options to get advertisers to reach users similar to their existing audiences.

They are also growing internationally and during the recently ended quarter, expanded Twitter Ad operations in 12 additional markets in Europe. They added 12 new countries for the self-service ad products for small- and medium-sized businesses.

Additionally, Twitter also announced plans to partner with IBM’s data analytics offerings to help trace customer sentiment about brands, and improve customer engagement with products. The move will help business leaders make more informed decisions about their product inventory.

Twitter’s stock is trading at $39.51 with a market capitalization of $24.32 billion. It touched a 52-week high of $74.73 in December last year. Twitter hopes to improve market sentiment by announcing several senior management changes. But that hasn’t helped either as they have done those changes far too often now.

Judging by most indicators, Twitter looks to me like a highly overvalued company right now. They have not outlined a strategy to justify the valuation, and unfortunately, unless that clarification comes along relatively soon, the stock will drop further.

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