Business Behind the Brand – $TWTR Twitter

Susan
By Susan January 24, 2016 09:26

Business Behind the Brand – $TWTR Twitter

 

 What is Twitter?

 

If a conversation runs on social media, Twitter is often mentioned in the same breath as Facebook. It might not have the same number of members as the giant Facebook, but Twitter has become a big part of the social media landscape. Here is a short primer if you’re still not quite sure what Twitter is: it’s a global platform allowing people to share short, 140-character messages in real time. It has been dubbed the “SMS of the internet”. If you’re interested in what somebody has to say, you can “follow” their messages, called “tweets”.

 

 How do I use Twitter?

 

I use Twitter (@SusanHayes_) to tweet messages out to my audience, or “followers”. I’ve used this as a platform to let them know that I’ve published a piece on Brexit, another one on the consumer-2-consumer economy or one on how to deal with fear of success.

It has proven extremely useful when I want to interact with people at an event or to promote the latest featured article: I can tweet that I have arrived at the event, letting know the people who might want to meet up with me; I can tweet snippets from a speaker I am listening to at that event, or I can tweet to let people know that I’ll be onstage in ten minutes. But Twitter is vast. To turn Twitter into an instant messaging service with your chosen group of people and avoid your targeted messages being lost in the sea of tweets, you can use a hashtag (#).

I remember finding out on Twitter that Seamus Heaney and Steve Jobs had died. When I’m travelling, I check out my favourite TV programs using the relevant hashtag to keep up to date on latest developments… In addition, if you see what’s “trending”, that is, what is being spoken about by the most active users in a certain location, it gives you a wonderful window into the minds and preoccupations of people.

I was interviewed about Twitter on the Sunday Business Show (Today FM) with Conall Ó Móráin. Listen to the podcast:

 

 

 How big is the company?

 

Twitter is a very young company: it was created in 2006 and went public on 7th November 2013. As of Friday 21st January’s close, $TWTR had a share price of $17.84 and a market capitalization of $12.18 billion.  As per the Q3 2015 announcement, Twitter has 320 million monthly active users and 80 of them are on mobile. Twitter leads to 1 billion unique visits monthly to sites with embedded tweets. The company has 4300 employees around the world with 44% of them in technical roles.

The 2015 revenue is expected to be approximately $2 billion for 2015 with an EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) of $531 million. However, the earnings per share has been negative for years, primarily due to huge R&D spending, high growth-oriented operating cost and significant stock based compensation. Since the company listed, investors have simply watched Twitter making progressively less of a loss as the company has accumulated a collective deficit of $2 billion while simultaneously gathering $3.5 billion in cash. To put that in context, the company has $427 million current liabilities (i.e. bills falling due within the year) and its total liabilities equal $2 billion. In other words, Twitter can cover every single debt it has, if it was called in this minute, almost twice over.

 

 What challenges has Twitter faced?

 

  • It struggled in recent months to find a permanent CEO and this has been resolved when one of its founders, Jack Dorsey, took on the role… while holding down the same role at Square, a fast-growing payments company a couple of doors away from Twitter, not an ideal situation.
  • The scope for anonymity and the unfiltered nature of Twitter’s content has paved the way for the platform to become a place for uninhibited abuse to run rampant. I’ve often been shocked and appalled to read some of the things one person directs at another on Twitter and the thoughtless negativity directed at those in the public eye. While this hasn’t gone away, Twitter has a quality filter now among routes to report abuse. This is something Twitter will have to continue to work on.
  • Private messages (DM’s) were limited to the same 140 character length, but this has been increased now to 10,000 characters which equals approximately 2200 words.
  • Goldfish have a much longer concentration span than people with Twitter accounts (and I count myself in this hyper-impatient group) and hence, users didn’t want to wait a couple of seconds for an image or video to load within the app. Naturally, Twitter didn’t want to encourage its users to go outside of the app to view these assets either. As a result, images and videos load and run as you’re scrolling down through the feed. It’s gone a step further with new services like Periscope; a live video streaming platform, and Vine, a mobile service that lets you capture and share short (6 seconds) looping videos.
  • If you’re a new Twitter user, it’s very easy to be overwhelmed with the sheer number of accounts you can follow… and then get very bored with clutter. This can put a new user off, leading them to either closing their account completely or simply disengaging. “Moments” is what Twitter has come up with as a solution to this as “the best of what’s happening on Twitter in an instant”. In essence, an in-house editorial team constantly monitors the site to highlight content packaged in readable, shareable bytes. At the time of writing, Moments as a feature is only available in the US, Brazil and most recently, the UK. Naturally, there is a handle @TwitterMoments if you want to see what this looks like and how often it appears in your timeline.
  • It’s easy to get bored with useless chatter or the aforementioned vitriolic negativity that can dominate your screen sometimes. This can happen due to the chronological order in which the updates appear. Twitter have stepped in here to push the most popular tweets to the top and the “while you were away” feature hooks you in within seconds when you open up the app!
  • In the past, if you wanted to get a sense of what this Twitter thing is all about without signing up, you couldn’t. Now, the twitter.com homepage has emotive images with tweets including handles, hashtags, a date and author. Further, people who are not Twitter users can access the Moments feature: this gives potential interested users a sense of what it’s all about and the “best bits”.

 

 What are the current issues that Twitter face?

 

Growth of three key metrics

 

The company needs to grow domestic and international revenue, find efficiencies, increase the ad loads, attract new active users, develop new advertising partnerships and monetise logged-out visitors and syndicated viewers. The business needs to constantly focus on increasing the number of people on the platform, increasing their engagement and turning their activity into money.

Twitter told the world that in Q3 2015 they experienced 165% growth year-on-year in ad engagements, but a 39% decline in the cost per ad engagement. One of the key developments that recently made headlines is the proposed change in the tweet length aka “Beyond 140”. The defining characteristic of Twitter is the 140 character length message… but this is also a limitation for anybody who might want to write a longer note. Until now, people might link to another page outside of Twitter – which is problematic for Twitter since it leads people away from its site -, or else take a screenshot of text and tag the image. Now, the company is considering increasing the length of tweets to 10,000 characters. Some may argue that if this happens, Twitter is no longer Twitter. In my view, this would be a mistake. However, the difference between the platform in 2006 and today is 320 million active participants. This is an immensely powerful community and changes the parameters of what defines the asset now.

 

Takeover rumours

 

While Twitter’s revenue trajectory is spectacular, its share price has followed the opposite path. It listed at $26 per share when it listed on the 7th November 2013. In a frenzy of trading that day, the share rose to the height of $50.09  and then made its own record by reaching $74.73 before the end of that year. Since that, it has drifted lower and lower to where it’s now well below that initial purchase offer price at $17.84. The company doesn’t have preferred stock, so an investor with deep enough pockets and strong enough ambitions can soak up enough shareholding to gain significant say in the strategic equity direction of the company.

On Wednesday 20th January, a rumour hit the wire that News Corp may be interested in buying out the company and the share price jumped 12% with excitement. This subsequently proved to be false and the stock held the gain thereafter. However, one does have to ask: if a company isn’t making a profit ten years later, has immense potential if the correct interdependent strategies were executed, and the CEO has another sparkler of a company where he is in situ, is the company ripe for a takeover?

Further, who might be on the other side of the transaction? The most obvious is Google; as it has plenty of money to buy the company at its current market cap and a lot more. Its own social network, Google+, hasn’t gained a shred of the same traction as Twitter: to Google, Twitter could become a strategic investment, in much the same way as WhatsApp was to Twitter.

Twitter is also a serious rival to “googling” when one wants to search out information. Google will show you what’s most relevant to your keyword search, but Twitter will tell you what’s most timely. Other potential buyers come to mind, including FaceBook, Microsoft, etc., but apart from having more cash than what they know what to do with, what benefit would Twitter actually bring to them that would leverage their own businesses? There are other alternatives being speculated upon, but a natural suitor doesn’t jump out at this time.

 

Executive Exodus

 

Twitter was in the headlines again this week as four of Twitter’s top people left the company; each of whom had been there an average of five years. The message was delivered by @Jack himself with a screenshot of a press release. (Ironically, this is the very reason he wants to extend the 140 character limit). The market initially reacted badly, wondering if this spelled disaster for the company: perhaps even the people at the top of the business didn’t believe in it any more. However, since then, there have been musings that maybe it’s the case that Jack Dorsey wants to elevate existing talent and bring in new fresh ideas. To use an old adage “what got you here won’t get you there”. Let’s also bear in mind that since Jack Dorsey came back to this top role, he has cut the workforce by 8% with the rationale that smaller companies are more nimble and such environments are more conducive to startup innovation. (Few would doubt there was a cost-cutting rationale in there too under the relentless pressure from Wall Street).

 

Earnings Call 10th February 2016

 

Earlier this year, the company sent out a press release noting that the Q4 earnings and full fiscal 2015 year results would be issued on 10th February after the market closes. Given the decline of the share price below IPO levels, the (quashed) rumour of last week, the return of Jack Dorsey, the tried patience of investors as they see quarter after quarter of losses, this conversation, to be held on conference call, Twitter and Periscope, will be very interesting indeed. There has been a lot of criticism levelled at Twitter about its flat user growth. By now, the markets, analysts and the media are operating off very old information (i.e, Q3 2015) and this update will be met with great attention.

 

 How do the finances look?

 

According to a comparative analysis between 2013 and 2015:

  • The revenue is growing at a phenomenal rate, albeit decelerating. In Q2 2013, the company generated $139 million and by Q3 2015, this had risen to $569 million, representing 58% year-on-year growth. Twitter has given guidance of a $695 million – $710 million revenue range for Q4 2015, which at its mid-point, delivers 23% quarter-over-quarter growth. From a top-line perspective, Twitter is a super performer with the potential to go very, very far yet.
  • The breakdown of revenue is 90% advertising and 10% data licensing. However, the geographical split of turnover is diverging. In June 2013, 75% of revenue was generated in the US and 25% internationally. This has evolved into a 65% domestic, 35% international composition and highlights again the sales opportunities available to Twitter as it expands deeper into global networks. Finally, 80% of people who use the site are on mobile, but the company yields a disproportionately higher 87% of its advertising revenues from this source.
  • The profitability of the business is improving, but it’s still not in the black. Its EBITDA arrived at $142 million in Q3 2015 which represented 108% year-on-year growth and a 25% margin, beating expectations. The last quarter of the year is expected to be better again and in the range of $155 million to $175 million, approximately 23.5% margin. However, Twitter pays out a lot of stock-based compensation and when this is added to interest, depreciation, amortisation and taxes, the GAAP earnings output a loss. For example, as mentioned earlier, the company made $142 million in Q3, but then paid out $166 million of stock based compensation, accounted $81 million in depreciation, $23 million in interest and other expenses and finally $3.1 million for taxes. Putting all of this together yields a quarterly loss of $132 million, but an improvement on the $175 million loss during the same period the year before.
  • As the company has grown, the amounts spent in building the long term sustainability of the business has grown also. Research & Development invoked $48 million of expenditure in Q2 2013 which equated to 34.8% of revenue. In Q3, this jumped to $207 million and 36% of the top line. Sales & Marketing moved from $43 million (30.7% of revenue) in Q2 2013 to $208 million (36% of revenue) in Q3. This doesn’t help the short term bottom line, but should reward the longer term investor with a better, fitter business if the strategies are executed successfully and a focus is applied to efficiency.
  • Its cashflow is in a very healthy position. As mentioned previously, it has enough liquid money to pay off all of its short and long term debts and still have about $1.5 billion left over. The cash being generated from its operations is strong and growing. During the nine months to September 2015, cashflow from operations stood at $283,828 versus $38,478 from the same time frame the year before. If the stock-based compensation was replaced with salary, this would have a very significant impact, but GAAP ensures we see the effect of this in any case.

 

 Is there value in the stock?

 

In short, Twitter has never been cheaper. The share price saw numbers last week that it hasn’t seen before – and yet its revenue and EBITDA have never been higher.  We can’t examine a P/E ratio as it doesn’t make sense with a negative denominator, but on a Market Cap/Revenue basis, the stock is trading at approximately 6 times, which is a world away from the 28 times it traded in December 2013. However, it still doesn’t have a positive GAAP EPS and isn’t making it easy for investors to see when that might happen – which makes them question if it ever will.

Looking back over Twitter’s life on the exchange, it has met its revenue goals over and above what it set out to do, over and over again. However, it’s still not making a profit and as the adage goes: “earnings drive share prices”. Personally, Twitter is not my usual type of stock. Ordinarily I go for a company that is making strong, sustainable profits, generating a dividend at good value.

On this occasion, I’m adding on a small holding of Twitter to my portfolio given that its P/Sales is so low relative to its own history, it does have longer term profitability potential and has a relatively small enough price tag to be bought out by a bigger player or private consortium. There isn’t any doubt about it, Twitter comes with a warning that this stock could dramatically rise or disappear. Whatsapp, Snapchat and Facebook messenger are continually innovating, Twitter needs to act fast to succeed or be irrelevant.  It has all the characteristics of a high-risk, growth stock and it is not a stock I’d recommend for the average DIYInvestor or retail investor. The volatility will lead to a permanent loss for many investors, stay away.  On a technical level, I would prefer to see the MACD (Moving Average Convergence Divergence) move into positive territory before executing a buy market order. Alternatively, I expected earnings surprise on 10th February I could buy a call option or bull call spread to expire in March to take a low-risk, short term view on a  or sell a put option later into the year and generate some income while I wait for Twitter to move closer to their elusive profit.

In reality, Twitter is not a stock I’d normally have in my portfolio but on this occasion I’ll take a very small position and add it to a diversified portfolio. (Repeat) Twitter has all the characteristics of a high-risk, growth stock and it is not a stock I’d recommend for the average DIYInvestor or retail investor. The volatility alone could lead to a permanent loss for many investors. I’ll update the post again after the 10th Feb earnings report.

 

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Susan
By Susan January 24, 2016 09:26