Thesis Summary
Twitter Inc (TWTR) IPOd in 2013 and started to turn a profit as recently as 2018. With daily users reaching a plateau, investors are less than excited with the company. However, I believe that given Twitter's unique value proposition, the current price offers a great potential return for investors
Twitter has become one of the most popular sources of news and entertainment over the past 5 years. The concept and business model is quite similar to Facebook Incs (FB) and most other social media platforms. Twitter allows you to create an account and share your thoughts with the world in a concise way. And like FB, Twitter leverages its user base by selling ads on the platform.
While the company's revenue has been increasing at double digits, profitability is still a new word in their vocabulary.
Source: 10-K
As we can see above, the company only started posting positive income in 2018, at around $1.2 billion, which grew to $1.46 billion in 2019. However, this number is misleading, the only reason that income increased was due to a much larger gain from a provision for taxes. Operational Income decreased by close to 7.8%. Costs have increased faster than revenue, at around 20% YoY increase.
Source: 10-K
The balance sheet, at least, seems quite strong. The company holds a strong cash and ST investment, enough to cover ST liabilities. Overall, assets are plenty to cover liabilities, the D/E is m0.36 and financial leverage, as calculated by morningstar is 1.46. Even though the company has just started reporting earnings, the financial position is incredibly strong.
There is certainly hard evidence supporting the bear thesis on Twitter. The last couple of years have shown lackluster growth in terms of users on the platform.
Source: Statista
The chart above shows quarterly growth, which has plateaued and even decreased in the last year, with a little uptick in the last quarter. This poses a big threat to sustaining ad revenue growth.
Source: 10-K
The engagement numbers are not encouraging either. Ad engagement has continued to fall year after year, and likewise, costs per ad engagement have continued to fall, putting even more pressure on twitter's revenue.
It is reasonable for investors to be wary of Twitter. Lackluster growth, combined with increased competitive pressure from the likes of Snap Inc (SNAP) is a very real threat to twitter. Nonetheless, Twitter is still a valuable company, the real question is; how valuable?
Despite the slowdown in the usage of the platform, some encouraging data can be shown. Unsurprisingly, this is the first number Twitter throws at you when going through their statements.
Source: 10-K
Rather than talk about daily active users, Twitter refers to Monetizable Daily Active Users, referring to those users that can produce revenue for the company. In this regard, 2018-2019 has seen an increase of 20%.In this regard, there are a few key areas where I believe twitter can and will shine.
Firstly, the numbers above show that Twitter is taking the right steps to make its platform advertiser-friendly. The platform itself seems to be well geared towards this, with short and to the point messages being the main reason behind its existence. And its main users seem to be in the higher income bracket, with over 50% of its users being between the ages of 25 and 50. Furthermore, Twitters target demographic appears to be more focused on higher-income individuals.
Furthermore, Twitter is looking at expanding its business in a way most other social platforms havent done yet, opening up their platform to programmatic buying from outside platforms and agency trading desks. This means Twitter will relinquish control and allow outside companies to more easily integrate with the platform.
Finally, it is my own opinion that Twitter is a lot further away from being replaced that some of the other platforms out there. Twitter users are generally avid users. The platform serves not only to communicate but also to stay informed and up to date with news, sport, and overall trends. Twitter is the perfect outlet for people and businesses voices to be heard, and there doesnt seem to be an alternative.
To this extent, other companies like Snap and TikTok are more susceptible to changes in fads and trends. Twitter shines for its simplicity and straightforward value proposition-
At todays valuation, Twitter offers investors a great price into a company that has a higher intrinsic value and substantial upside potential. With a TTM P/E of just above 12, the company seems grossly undervalued compared to peers such as SNAP and FB. Sure, FB has a much longer track record and is much more profitable, but I fully expect Twitter to play catch up and I believe we will soon see Twitter posting higher revenue growth than FB. With its current balance sheet and the further profitability from Twitter, it is only a matter of a couple of years before Twitter can deliver value to investors in a much more substantial way.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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