As I wrote in my last post, Twitter has an “irreplaceable position in our culture and that should command a higher floor multiple than usual.”
Twitter is mostly used as 1) online discussion board, 2) source of near real time news. As an investor I’m intimately familiar with the former use case.
Twitter as an online discussion board provides unparalleled access. Where else can you debate with, and learn from the Nobel Prize winners like Paul Krugman? (yes, I know it’s easy to hate on him nowadays, but still…) Many of these thought leaders will patiently reply to your questions. Even without participating in discussions, just following the debates on Twitter can be more educational than years of reading textbooks.
Twitter is also the irreplaceable source of real time news. The best example I can think of is when Turkey was going through its failed coup a few years ago. Instead of waiting for mainstream media, people went to Twitter. From our computers and cell phones, we saw Turkish citizens flooding the street; we saw civilians unarming soldiers in tanks; we saw the momentum turning in favor of Erdogan and the ultimate coup failure. It was all live on Twitter.
So we have an incredibly differentiated asset here. What is something like that worth? At $30/share, the stock is still trading at ~17x LTM management adjusted EBITDA (big stock based comp add back here). It’s not cheap for sure. But there is a floor and at any given time, operating momentum can turn and the stock could go on a run. All I can do is hold and wait.
Where are We on Value Drivers?
Twitter makes money from advertising. The main financial drivers are:
• Number of advertising engagements
• Price per ad engagement
As can be seen above, ad engagements growth has decelerated in recent quarters while ad prices have been less negative over time. This is price elasticity in action. The market took its time to find the right price for Twitter’s ads.
It’s worth noting that much of the gains in ad engagements come from gains in mDAU (monetizable Daily Active Users). To see this, we further break down ad engagements into 1) number of users (mDAU), and 2) ad engagement per user
As seen above, mDAU growth reaccelerated in recent quarters. On the other hand, growth in ad engagement per user came down to mid-single digits yoy. It’s not clear why this is the case. I think part of it is tough comps. Another reason could be new users have not turned into “power users” yet. I believe product upgrades can re-accelerate this metric.
Which brings me to Twitter’s levers.
Upside Levers - Engagement Growth
• Number of advertising engagements
• Price per ad engagement
As can be seen above, ad engagements growth has decelerated in recent quarters while ad prices have been less negative over time. This is price elasticity in action. The market took its time to find the right price for Twitter’s ads.
It’s worth noting that much of the gains in ad engagements come from gains in mDAU (monetizable Daily Active Users). To see this, we further break down ad engagements into 1) number of users (mDAU), and 2) ad engagement per user
As seen above, mDAU growth reaccelerated in recent quarters. On the other hand, growth in ad engagement per user came down to mid-single digits yoy. It’s not clear why this is the case. I think part of it is tough comps. Another reason could be new users have not turned into “power users” yet. I believe product upgrades can re-accelerate this metric.
Which brings me to Twitter’s levers.
Upside Levers - Engagement Growth
Twitter is accelerating its pace of product development.
The company really cleaned up its user interface the past few months. Visible improvements include: lists are much easier to create, organize, and use; searches are easier to access; bookmarks are now in the main menu. The whole app is just better organized in a common sense sort of way.
These are low hanging fruits – fixes that’s should have been done long time ago. There was no reason why accessing lists should require 3 clicks instead of one.
The point though, is Twitter is finally waking up and getting things done. Combined with its "health" initiatives (reducing toxic tweets), these changes reduce friction and make it easier for users to find the content they want. This can lead to better engagements per user.
The upcoming interest based list is an example of reducing friction. We might follow specific users for their stock analysis, but it gets annoying when that person spend 20% of his time talking about his favorite politician. A list based on specific interest/topics (just stock analysis in this case) would side step that issue. This is easier said than done. How will Twitter curate only quality tweets? We’ll have to see how Twitter executes.
Upside Levers - User Growth
Twitter is also trying to increase mDAU and drive TAM expansion with new products. The most important ones are 1) sports events/highlights, and 2) live videos.
First, Twitter is now regularly showing sports events at the top of the app. Clicking into these you can see sports highlights and the latest commentaries. This is a proprietary format if you think about it. Sports highlights are not unique. Comments are not unique. But near real time sports highlights, with humorous takes from like-minded people – that is an unique format.
Second, and somewhat related, is live videos. After failing to integrate Periscope for years, Twitter is now actively showing live videos at the top of the application. Since live videos are at the top of the app, it is essentially guaranteed views, and will incentivize more creators to make more live videos. More supply will in turn draw more demand. Presidential candidate Andrew Yang took advantage of this a few weeks ago by broadcasting a live Q&A session.
Sports highlights and videos represent different use cases from old Twitter. As Eugene Wei noted in his classic essay Invisible Asymptotes, the traditional power user of Twitter are infovores who thrive on the texts. However, this group is a small subset of the overall population and represent limited TAM. I think video products can break that limitation by appealing to a different type of audience.
The levers discussed above are opportunities just within the Twitter application itself. Twitter can also let third party developers build on top of its one-way follow infrastructure and take a cut of revenues.
There are so many possibility for Twitter that I believe a paid subscription model should be the last resort.
The company really cleaned up its user interface the past few months. Visible improvements include: lists are much easier to create, organize, and use; searches are easier to access; bookmarks are now in the main menu. The whole app is just better organized in a common sense sort of way.
These are low hanging fruits – fixes that’s should have been done long time ago. There was no reason why accessing lists should require 3 clicks instead of one.
The point though, is Twitter is finally waking up and getting things done. Combined with its "health" initiatives (reducing toxic tweets), these changes reduce friction and make it easier for users to find the content they want. This can lead to better engagements per user.
Upside Levers - User Growth
Twitter is also trying to increase mDAU and drive TAM expansion with new products. The most important ones are 1) sports events/highlights, and 2) live videos.
First, Twitter is now regularly showing sports events at the top of the app. Clicking into these you can see sports highlights and the latest commentaries. This is a proprietary format if you think about it. Sports highlights are not unique. Comments are not unique. But near real time sports highlights, with humorous takes from like-minded people – that is an unique format.
Second, and somewhat related, is live videos. After failing to integrate Periscope for years, Twitter is now actively showing live videos at the top of the application. Since live videos are at the top of the app, it is essentially guaranteed views, and will incentivize more creators to make more live videos. More supply will in turn draw more demand. Presidential candidate Andrew Yang took advantage of this a few weeks ago by broadcasting a live Q&A session.
Sports highlights and videos represent different use cases from old Twitter. As Eugene Wei noted in his classic essay Invisible Asymptotes, the traditional power user of Twitter are infovores who thrive on the texts. However, this group is a small subset of the overall population and represent limited TAM. I think video products can break that limitation by appealing to a different type of audience.
The levers discussed above are opportunities just within the Twitter application itself. Twitter can also let third party developers build on top of its one-way follow infrastructure and take a cut of revenues.
There are so many possibility for Twitter that I believe a paid subscription model should be the last resort.
I can see Twitter increasing its revenue mid to high teens CAGR for the next 5 years. A reasonable base case would be something like 5%-10% growth in mDAU, 5%-10% growth in ad engagement per user, and flat ad pricing. If TWTR just shows a little operating leverage (this is a software company after all!), it’s not hard for the stock to double.
Notes:
1. Vergecast did a nice podcast with TWTR’s product head recently and talked about product opportunities. You can find it here.
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