Fundamentals
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PREFACE
CML Pro research reveals evidence that there is a substantial turnaround occurring at Twitter, one that addresses some of the critical concerns surrounding the stock. We’ve gone to the source, digging through Twitter statements in earnings calls and publications. Here’s a taste:
Twitter says that it has seen across-the-board increases in likes per-user favorites, retweets, replies, tweets and daily usage following the new timeline’s debut.
Source: TechCrunch via Twitter
FINDING THE NEXT GEM
Before we dive in, remember to keep this in mind: Everything we do here at CML focuses on the future — we don’t particularly care for analysis that dissects $0.03 of EPS or a 10% vacillation in revenue forecasts for the next year. In order to find the ‘next Apple’ or 'next Google’ we have to get ahead of the curve. Our mission is to find the booming themes and trends, and the companies best positioned to show out-sized growth in a colossal shift forward, and then to share these insights with our community of members.
Now, it’s time to focus on Twitter.
I. SOCIAL MEDIA
Twitter’s monthly average users (MAUs) have stopped growing. In fact, the firm might have even seen a tiny drop last quarter from 307 million to 305 million. This does not include logged out users – remember that, it’s a critical point later on in this discussion. This also doesn’t include the SMS text-based 'fast followers.’ Here’s the chart from our friends at Statista:
So that’s a reality. The reason why is subjective – some people say Twitter is too hard to use for new visitors, others say it doesn’t inspire high engagement rates for new users causing them to drop off. Answer the “why” is going to be critical to Twitter’s management being successful at growing the company. Now we finally have evidence that they may have cracked the code.
Meanwhile, critically, revenue growth has not been a problem. Here is Twitter’s all-time revenue chart (TTM):
Best estimates put $1.8 billion of that $2.2 billion in revenue coming directly from ad sales. Here is a chart that compares Twitter’s revenue (TTM) growth over the last year with other technology companies of similar market caps:
That’s very good news, but let’s take a step back, the lack of user growth is not only worrisome because we want to invest in growing companies, but also because Twitter is bucking the broader thematic trend. Social media usage is itself growing. Snapchat, Instagram, Facebook Proper, WhatsApp, Facebook Messenger, Quora, Pinterest – these are all social media that have been around and continue to find growth.
Here are some wonderful charts. First, the number of social media users worldwide through 2018 via Statista:
As of 2015, the world saw just under 2 billion social media users and that number will rise by 25% through 2018. But it’s really only the beginning.
Here’s a chart from 'we are social’:
With 3.4 billion people online and 3.7 billion unique mobile phone users, still only 46% of the world is connected to the Internet. Active social media users are only reaching 31% of the globe.
As technology proliferates, there is yet more room for growth in a segment that we are already measuring in multiples of billions.
I. SOCIAL MEDIA: TURN AROUND
There is evidence of a turn around at Twitter. To start, Twitter has been given prime real estate on Google search. On the Q3 earnings call, Twitter stated that it receives billions of impressions on tweets on Google’s platforms every day. The company went further to state that these impressions provide a great source of traffic back to Twitter.
A prime example: on March 21st Apple held its product event. When we did a search for “Apple March 21st event,” on Google, we got this:
We have highlighted that prime real estate in yellow. The point here: Twitter still has a massive hose pouring new visitors to the site. That does not appear to be the issue.
The issue is engagement. In fact, back in 2013, we saw this chart:
You will find more statistics at Statista
We can see that engagement is quite low when compared to Facebook.
Cracking the Code
We aren’t looking for a reason to believe that Twitter can find more traffic, what we’re looking for is a reason to believe that the company can increase engagement of the traffic it already has. If it does, the new visitors will turn into returning users, and current users will come back more often. That’s a recipe for substantial MAU growth and that is the code we just cracked.
It’s uncomfortable to wait, to not know the outcome, to be patient, but this is the reality:
It’s not a traffic problem – it’s an engagement problem.
I. SOCIAL MEDIA: ENGAGEMENT
Against a barrage of criticism, Twitter changed the way its timeline worked for users from chronological to interest based. Here’s a snippet from a TechCrunch article:
[A] filtered timeline to users which would show recommended tweets at the top, instead of just the most recent ones.
This is a big change for a network that’s historically been focused on being a real-time feed of information.
Now, the big news. TechCrunch reported that Twitter told them this:
Twitter says that it has seen across-the-board increases in likes per-user favorites, retweets, replies, tweets and daily usage following the new timeline’s debut.
Source: TechCrunch via Twitter
I have verified this directly with Twitter. Friends, if we’re looking for a reason to believe MAUs will grow, then we’re looking for a reason to believe engagement will grow, and we just got word straight from the company.
I.SOCIAL MEDIA: USER GROWTH
It turns out that user growth hasn’t stopped everywhere – it’s mostly a North American phenomenon. India is the second largest social media market, and Twitter is doing just fine there:
In fact, the distribution of Twitter users by region shows a large uptick in Asia Pacific. This chart is from our friends at Statista:
Now, Twitter has confirmed that the timeline changes have “reached all of Twitter’s user base.” That means engagement should be rising everywhere – both in stagnant markets like North America and Western Europe, and the growing regions in Asia Pacific.
There’s your growth thesis, right there. And here’s more:
I.SOCIAL MEDIA: MORE USER GROWTH
It’s the smallest things, sometimes, that signal a change in thought process — a change in understanding and approach. It’s one of these small things that just happened, and it means Twitter’s management has finally turned off the over intellectualizing of its social media property it thinks people need and turned to what people want.
The brilliance behind Facebook and (soon Apple’s (AAPL) social media called “social groups”), said in a very simplified way, is its ability to give people what they want. Facebook won’t affect the Arab Spring or the political vernacular, but it will let people watch cat videos, share fun memes and generally be social in a digital environment.
Twitter has not done that. It’s quippy, intellectual, and up until now, has felt “too good” for memes, cat videos and generally, “fun.”
Very recently, Twitter added a little button on its mobile app to find animated gifs. Here’s a screenshot:
Animated .gifs are now dominating social media because they increase engagement. They are fast to transfer and fast to load, unlike videos. Increased engagement means more users, more time on the platform by users and more social interactions between users. All three of those descriptions are weaknesses for Twitter and all three translate into revenue from ad sales.
The animated .gif library Twitter offers is not a game changer in and of itself. But it is a radical first time move that shows Twitter has addressed the difference between what people need and what people want.
For Twitter to grow it must get past it intellectualized, pedantic and at times confusing approach, and replicate the success of Facebook, Instagram, Snapchat, etc.
Twitter finally gets it, and if the company can make its spectacular intellectual social media company into one that is also welcoming, fun and engaging, it will see MAU growth.
Now let’s quickly talk about new revenue sources.
I. PROGRESS: MASSIVE AUDIENCE GAIN
The news released on December 10th is enormous.
Twitter announced Thursday that it will start showing ads to its “logged out” audience, a group of roughly 500 million people who visit Twitter every month but who don’t have active user accounts.
Twitter has long been telling us that the 320 million monthly average user (MAU) number is vastly understating its user appeal. And by vastly, we mean, the number looks more like 800 million users.
As of December 10th we now know that Twitter is going to start monetizing this base. On Twitter’s last earnings call, COO and head of revenue, Adam Bain, said that the company believes these ads will monetize at about half the rate of usual Twitter ads (Source: re/code).
The company could see a potential revenue opportunity of $1.3B. Keep in mind, Twitter’s revenue last year in total was $2.2 billion – so this is an enormous opportunity.
While the program is still in beta, we also learned this: On the Q4 call the performance of ad units was in some cases as good as when those ads were shown to logged in users The company was clear that it was making reference to a specific ad unit performance, not overall average revenue per user (ARPU). But, it’s our empirical evidence that at least a 50% rough estimate in terms of monetization is a reasonable place to start and at 60% more revenue, that’s all the news we needed from this breakthrough.
II. DIGITAL ADVERTISING
The vast majority of social media monetization occurs through advertising. In fact, in its latest earnings call, Facebook revealed that 96.5% of revenue came from ads — 80% of that from mobile ads.
Here is the worldwide digital advertising market, projected out to 2018 via eMarketer and Statista.
By 2018 we’re looking at over a quarter trillion dollars in digital ad revenue. As a point of reference, the world changing Virtual and Augmented Reality market is estimated to reach $150 billion by 2018.
III. ONLINE VIDEO ADVERTISING
Not all digital ads are created equal and the hot spot right now is video. Facebook and Snapchat recently reported that 8 billion videos are viewed every day on their platforms.
Video streaming and video ads are the fastest growing segment in advertising. Via Statista:
Online video advertising spending in the United States will hit $9.1 billion in 2016, up from $4.4 billion just two years ago.
On the earnings report on 7-16-2015, Google disclosed that watch time for YouTube rose 60% in the second quarter and the video service had more viewers aged 18-49 on mobile alone than any U.S. cable network.
In January Periscope was made available to stream inside Twitter feeds, instead of needing to follow a link. Periscope already boasts 10 million active users and hosted more than 100 million active broadcasts. This is the battlefield, and it could breathe yet another massive revenue flow into Twitter.
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TWITTER IS NEED
Social media is just a phrase, in the guts of it come many different kinds of flavors. In its core DNA, Twitter is not a messaging service, not a photo sharing service and not a personal friend and family timeline service.
We believe Twitter comes in, not so much as fun, but as necessity. Almost all of human history will tell us that selling what people 'want’ is a much larger business than selling what people 'need,’ but Twitter’s dominant footprint in 'need,’ is a part of the bullish thesis. Facebook’s delivery of want is a part of that compnys bullish thesis.
Twitter is real-time communiques. It is the enabler of social movements, the creator of the hashtag that actually matters.
#BlackLivesMatter
This hashtag has been emblazoned across signs held among the thousands of protesters who are calling for an end to police brutality and the killings of African-Americans in the U.S.
#Jan25th
During the Egyptian uprising, this hashtag was used to mobilize protesters to join the demonstration on Jan 25th on Tahrir Square.
TWITTER IS NEED: APPLE
Apple Support just recently officially joined Twitter to better access its customers. That’s a need – not a meme or a cat video.
The account was launched on March 3rd and in its first 18 days, the account has seen 214,000 followers, and more importantly, 19,000 tweets. That’s more than 1,000 messages a day to customers that are just now realizing this account exists.
FINAL WORD
We know Twitter’s user growth problem is in fact an engagement problem. Twitter has changed the DNA of its timeline – and that change has seen improved engagement across every measure they have. Add the animated .gif library and we have some context to believe that management has in fact found the magic bullet to engagement and that means user growth.
Add on top of that potential user growth an already booming revenue growth and a just started beta program that should add another 60% to revenue when fully rolled out, and you must say, objectively, that there is at least a reasonable bullish thesis for Twitter. It doesn’t mean it’s right – but it does mean it exists.
There’s a reason Google is cozying up to Twitter and it goes way further than search results. We discuss those details in CML Pro, but Facebook may now be finding a legitmate competitor from a Twitter / Google team.
THE REAL WINNERS
The giants will battle for position and MAUs – that’s Google, Facebook and soon Apple with its new social network patent filing. But the net outcome could be equal sized gains.
To find out if Twitter will be a winner, or further yet, to find the 'next Apple’ or 'next Google,’ we have to get ahead of the curve. This is what CML Pro does. Our research sits side-by-side with Goldman Sachs, Morgan Stanley and the rest on professional terminals, but we are the anti-institution and break the information advantage the top .1% have.
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Thanks for reading, friends.
The author and the author’s household hold shares in Twitter as of this writing.
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