Can Twitter (TWTR) Reinvent Itself

Twitter might well be the decliner with the highest growth rates on the US stock market. Opposed to a revenue growth of 48% during the last quarter, its share price has plummeted with over 35% since the start of the year. That has brought the company’s market value back to $10 billion, compared to an IPO value of $17.75bn. At its peak, only two years ago, the company was even worth $51bn. Interestingly, Twitter’s user base has only grown during this period, from 200 million+ to over 320 million as of Q4-2015. So why are investors so negative about Twitter? As we reported earlier, this is related to a lack of profitability and concerns over monetization of its user base. However, with the company currently trading at 3.3 times expected 2016 sales, compared to 11.5x for Facebook, one could argue that Twitter shares are becoming dirt cheap. Let’s evaluate if current levels indeed offer a good entry level.

Twitter is at a junction

Despite the strong revenue growth during 2015, Twitter finds itself at a junction, according to Executive Chairman Omid Kordestani. There’s increasingly pressure on its basic model: short messaging of only 140 characters. CEO Jack Dorsey added at the recent earnings call that users do not really understand the rules for sending tweets. For example, when replying to a large group of users, adding the @username confuses a lot. Furthermore, using the hashtag and @username takes a lot of characters and thus restricts the content in the message. In private messages, Twitter already abandoned the 140-character rule and users can send messages of 10,000 characters. The integration of video streaming app Periscope, acquired by Twitter last year, also indicates that the San Francisco-based company is moving away from its basic 140-character service.

The point is, the current restriction doesn’t seem to bother its users a lot. Twitter’s monthly user base is more or less stable at over 320 million users, with few users able to turn away. Many of the 2 million users who opted out in the recent quarter, returned in January this year. Using images, some users are able to pass the 140-character limit. A photo says more than 1,000 words, especially when it comes to special occasions. Twitter is still the most used social messaging service when it comes to popular events.

Twitter focuses on live

Popular events are exactly what Twitter needs. CEO Dorsey stated that the messaging-app will focus on live. That makes a lot of sense, being one of the world largest real-time conversation facilitators. This is also where a lot of potential for revenues is. Conversations around live events draw attention and connect people. Furthermore, organizations will be keen in promoting events to attract this attention. Dorsey understands the fundamentals of Twitter being a live, public medium. Twitter’s number one priority is to make the social service more intuitive to facilitate live conversation. Intuitive use is required to attract new users and maintain existing users. Twitter’s management made refining the core service its number one priority.

But what about making money?

Twitter’s key selling point is it wide reach. Executive Chairman Kordestani indeed hits the nail on the head saying that whenever something happens in the world, it is shared through Twitter. Periscope adds an eye-catching live feature with video streaming. That makes the social medium very attractive to businesses and organizations, even for non-profit institutions. There will be number of key events in 2016 underlining the power of Twitter, for example the Olympic Games in Rio de Janeiro and the US Presidential Elections. The big question remains: is the company able to make money with its service? As for now, the strong increase in sales is an encouraging sign. The company recorded revenue of $2.2 billion in 2015, a plus of 58%. During Q4-2015, revenues reached $710 million, up from $479 million in the same period last year. Moreover, the company expects to book $595-610 million sales in Q1-2016. It will be interesting to see how Twitter’s decision to show ads to logged-out users will work out. Since the decision was made in December, Q1-2016 will be the first quarter that could give us a clue whether this has a major impact.

The company doesn’t disclose a full-year guidance, but analysts estimate 2016 sales to come in at $3.0 billion, a plus of 35%. The only problem: at bottom line, a loss of $392 is expected by the street (Thomson Reuters median estimates). Nevertheless, EBITDA increases strongly. Twitter recorded EBITDA of $558 million in 2015 and this number will grow to $781 million next year, a plus of almost 40%.

Twitter shares start to look cheap

According to 2016 estimates, Twitter is currently valued at 12.8x EBITDA. That’s much cheaper than Facebook (FB). The company led by Mark Zuckerberg is valued at 18.8 times 2016 EBITDA. Even after a 40% crash, LinkedIn (LNKD) is valued at 13.7x EBITDA. To be fair, contrary to Twitter, Facebook books a profit. Though with a price/earnings-ratio of 48 that isn’t a strong argument either (LinkedIn books a loss). As mentioned, investors pay 3.3x 2016 sales for Twitter compared to 11.5x sales for Facebook. LinkedIn is valued at 3.6 times 2016 sales, despite shattering investor confidence with its recent results.

At some point, Twitter becomes attractive for strategic investors. To be fair, it is difficult to imagine which company could make Twitter a good fit by acquiring the company. Nevertheless, as mentioned before, we shouldn’t underestimate Twitter’s user base and reach. Analysts of Deutsche Bank already stated that Twitter is probably the most undervalued company with a 30%+ revenue growth. In addition, the company is heavily shorted with over 40% of its free-float being short. The momentum in the recent months was clearly unfavorable. But when this turns, it may be a heck of a ride for Twitter investors.

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