Twitter’s Focus on Information Quality and User Experience Are Keys to Future Growth
Twitter Inc. (NYSE: TWTR) is a leader in social media and it has been growing at an impressive rate of 22.91% in the past three years. Twitter reported its first quarterly profit in February and there was revenue growth helped by expansion outside the United States. As a result, Twitter shares hit two-year highs. This is despite there having been three straight quarters of year-over-year revenue declines as reported in October 2017. The profitability numbers have been helped by the social network spending much less on stock-based compensation for employees than it was a year ago. Last quarter, Twitter spent $101 million on stock-based compensation and this was 36% lower than from a year ago.
Growth in Monthly Active Users Needed to Sustain Stock Surge
Twitter has been adding users albeit slowly with monthly active users numbering 330 million, up 4 percent from a year earlier. Twitter CEO Jack Dorsey has stated that the site is still too hard to figure out for users and advertisers. “One-third of the 2 million new people who come every day come with expectations of what (Twitter) should be, then get disappointed when they can't find what they want," the company CEO told an audience of investors gathered in San Francisco for the annual Goldman Sachs Technology and Internet Conference.
Twitter is now working providing each user with a more personalized experience. This would take into consideration the topic’s background and other content users come to the site for. The company is looking to make it easier for users to express themselves and that too in a faster manner. Going forward, the focus will not be just on text posts. As of now, video is the company’s fastest growing content.
Advertisers are also echoing the need to simplify things. Advertisers want eyeballs and Twitter will need to look at maximizing the number of people using the platform for a good amount of time. This will immediately see high profitability figures as it allows for better ROI.
In summary, Twitter will need to attract more new users.
Investors have gotten behind Dorsey and his company. The stock price continued to advance in 2017 starting the year at $16.31 and ending the year at $24.01. A high of $25.20 was achieved on December 20, 2017. In 2018, the stock price has surged even higher hitting a high of $35.76 last Wednesday. Considering the growth prospects, Twitter is seemingly trading at a discount relative to its long-term value.
Twitter is looking at making 2018 an investment year. “information quality” will be improved as Twitter reinvests more of its money on this feature. In this endeavor, malicious content, spam and fake accounts will be removed. Furthermore, identification of credible accounts will be made easier. Also, there will be investments in engagement and the sales team. Engagement and sales execution have been key drivers of profits for Twitter, according to its chief financial officer Ned Segal.
Challenges: Costs and Competition
The way forward is filled with challenges for Twitter and it has competition from the likes of Facebook Inc. (NASDAQ: FB), Snap Inc (NYSE: SNAP) and LinkedIn. Facebook is indeed a giant in the social media industry and it is one of the world’s most valuable companies. As of the fourth quarter of 2017, Facebook had 2.2 billion monthly active users and the growth in this particular user base is 14.5%. Twitter has its work cut out to compete with Facebook. One encouraging sign for Twitter is that people are spending less and less time on Facebook. Twitter can work on its news features to get nearer to Facebook. Here again, information quality is vital. Twitter has pledged to clean up the platform’s fake accounts and bots. It can look to compete on this front with Facebook which has stated that it too wants to find these “bad actors”. Facebook is doubling its review staff to 20,000 in order to do this and also employing artificial intelligence. As can be seen, the costs are huge and Facebook faces a steeper challenge with 200 million false accounts. On the other hand, Twitter has an estimated 48 million fake accounts.
Twitter does offer users a lot of privacy, but it doesn’t come close to Snap in this regard. Furthermore, Snap is a lot more nimble than Twitter. Snap is really popular among the younger generation. With Snap, a picture is sent and recipients are able to view it for a short period of time. The picture then vanishes and is never seen again. This offers people a high level of privacy without the worry that the photos might resurface at a later time. Twitter has to work on its photo and video features to compete with Snap. Also, Twitter needs to start buying video apps like Vine which it neglected in 2012. This will bring in more users to Twitter.
LinkedIn has stronger profile capabilities and features when compared to Twitter. The businesses overlap in terms of hosting public figures. According to investopedia, LinkedIn has a good shot a longevity because of its various revenue streams and its firm grasp on the job and career audience. Twitter has some unique advantages when compared to LinkedIn and this helped it become the number 1 social media site for salespeople in 2014. So the revenue opportunities are out there and Twitter needs to capitalize on it and move away from its heavy reliance on advertisement dollars for revenue. In addition, Twitter can look to compete with LinkedIn on the career front by doing what Facebook hopes to do.
Summing up, Twitter has struggled to turn a profit and this comes as a great surprise to investors as it has a ubiquitous media presence and popularity among celebrities, athletes and politicians. Twitter has looked to reduce expenses, but it can’t sacrifice R&D and sales/marketing as this could cost the firm future revenue growth potential. As it is, revenue grew just 2% in 2017.
Twitter by the Numbers: The Q4 2017 Earnings Report
The profit margin of 12.45%, the operating margin of 15.05% and the Return on Equity of -2.24% are all very encouraging on the financial front for Twitter. However, when looking at the big picture it appears that Twitter will fall short going forward. Adding users is becoming very hard and so it was important to look into this before crunching the numbers.
The numbers that investors will be checking are the P/E ratio of 108.79, the market cap of 26.26B and its Beta of 0.80 which reveals that Twitter is actually a low risk investment.
Twitter is now worth more than Snap. Most analysts recommend to hold Twitter stock and they don’t expect the price to rise further. Nonetheless, as a matter of fact, any sort of valuation is subjective in nature and has many inherent assumptions. The key takeaways are that revenue growth has been stagnant and user growth is slowing. CEO Jack Dorsey is busy cutting costs and this might actually pay off over the longer-term. It can be said that cost cutting could do more harm than good. But with Dorsey looking to fix information quality and the overall user experience, revenue could rise in the future. So it may be just that the right formula has been found by Dorsey in growing the social network with an eye on the profits.
It appears like a reversal of the uptrend could happen. The candlesticks sure tell a story of their own. The stock has been making a series of higher highs and higher lows over this one month period from February 2018. It certainly looks good for a chartist since it bottomed out at $23 per share somewhere around Valentine’s Day.
The stock has broken out over the 50 day moving average (50 DMA) of $29.85 and is much higher than its 200 day moving average (200 DMA) of $22.57. Traders will obviously be highly excited to note this; that is the bulls among us. The good news is that the upward movement (higher highs, higher lows) is going strong and bodes well for the bulls.
How to Trade Twitter
This is the crucial part of this analysis; it’s what short-term traders need to do. We all agree on the long-term value of this tech stock, but how can we make money off it in the near term? The good news is that investment analysts at Bank of America raised Twitter’s target price from $20.00 to $26.00 in a research note. In the last week, twenty-two investment analysts have given a hold rating. But, as many as eight analysts have rated the stock with a sell rating.
It must be noted here that there are more calls on the stock than puts as indicated by TWTR’s Schaeffer’s put/call open interest ratio of 0.81. Moreover, there are a few “overweight” ratings that holders of Twitter stock will be pleased to hear.
The next event that traders need to watch out for is the Q1 2018 earnings report scheduled to be released on April 24, 2018. It will be interesting to see Twitter’s profit numbers. The stock should soar higher when the company reports earnings in just over a month’s time. Speculators should consider buying stock despite the challenges that Twitter faces.
© 2018 vinayak1000